Selling your business can be one of the most important decisions you make in your life, and there are many factors to consider before signing that final contract. Here, we explain to you some of the terminology that may appear in your sale agreement, and help you understand the process involved in the sale.
An asset sale is a sale of all or only some of the assets of your business, including the goodwill, fixtures and fittings, and the property. Your buyer may also take some or all liabilities of the business. Although every sale is different, the legal terminology and some of the terms of the agreement will apply to most sales.
It is important to note at this stage that we would expect to work closely with your accountants throughout the sale process.
Heads of Terms
Once agreement has been reached in principle on the key terms of a sale between you and your buyer, it is common practice to record those terms in writing as heads of terms. Heads of terms are not usually legally binding, but we would recommend you seek legal to complete the drafting of the heads as it is often difficult to renegotiate the terms at a later date.
It is standard practice for you as the seller to ask a buyer to sign a confidentiality agreement to prevent them from using or disclosing the information they receive about your business. We can assist with preparing a confidentiality agreement for you based on your business ethos and requirements.
Due diligence process
This is the opportunity for your buyer to ask you questions about your business, identifying any problems there may be. Your buyer’s solicitors will usually produce a detailed due diligence questionnaire raising questions about your business to elicit as much information as possible about the way the business operates, your assets, employees and contracts with customers and suppliers.
While it is the responsibility of the buyer’s solicitor to complete this, normally at the very outset of the transaction so as not to cause delays, it is important you understand the process of due diligence and your responsibility when it comes to disclosing information. Here, we answer some of the most common questions about due diligence to provide some basic understanding for you:
Are there different types of due diligence?
There are; your buyer’s accountant will undertake tax and financial due diligence and your buyer’s solicitor will handle the commercial and legal side.
What can I do if my buyer discovers problems?
In this situation, your buyer may decide pull out of the deal, they may wish to renegotiate on terms or price, they may ask you to resolve the issue before proceeding or they may accept that they are taking the business with that problem. If there are problems discovered, we can assist you with the response to the buyer’s request on their chosen course of action.
Are there any common problems that due diligence tends to identify?
The most common problems tend to involve employees, property, environmental matters and pensions; all of which we can either assist with ourselves, or refer you to our colleagues in our Employment and Commercial Property teams.
Are there any tips for sellers?
It is important that you are well organised before the sale as this will help you answer your buyer’s questions quickly. Being honest and open is also crucial as any problems will come out at some point and it is much easier to negotiate or plan for these issues from the outset. If they are discovered further in the process, not only will there be delays but there will also be damage to the trust between you and your buyer.
How long does the due diligence process last?
It depends on the size and complexity of your business and usually the value of the transaction. Questions can be asked of you at any time before completion and therefore due diligence may last the entire length of the transaction. However, the initial and most intense stage for deals with a value of less than £5million tend to last between a fortnight and a month from beginning to end. We take the view that due diligence can be carried out while the purchase agreement and other documents are being produced in order to maintain momentum.
Can due diligence help sellers?
The purchase agreement will usually state that your buyer cannot bring claims for matters that they knew about before buying the business. Therefore, the more the buyer knows, the less chance of them bringing a claim later. It may also be cheaper and easier for you to resolve problems that are identified before the business is sold.
The sale agreement
This is the key document in the sale and is usually drafted by the buyer’s solicitor. The key provisions are:
Full warranties (i.e. assurances given to a buyer) relating to the assets being sold are usually included in the agreement. The warranty schedule is usually very lengthy and is heavily negotiated.
Purpose of warranties
The buyer has little protection if the deal turns out not to be what it expected. Warranties ‘flush out’ potential problems so that they can be negotiated and dealt with before the sale is completed and warranties also enable your buyer to obtain compensation if the business is not as the seller warranted. This is why it is important for you to be open and honest in the due diligence stage.
The effect of warranties
Warranties impose a legal liability on you as the seller to give complete and accurate information on the business. If you provide inaccurate statements about the business, as a result of which its value is reduced or your buyer suffers a loss, they may have grounds to sue you for damages for breach of warranty. In effect, warranties give your buyer the opportunity after completion to adjust the price.
Who gives the warranties
It is usually you as the seller to give the warranties, and if you are not the only seller, your buyer will usually require you to give the warranties ‘jointly and severally’ which means that each of the sellers is responsible for the full amount of any claim if the warranties are not correct. In practice, a buyer can sue whichever seller it considers is more likely to be able to meet a warranty claim for the full amount of that claim.
In the case of an asset sale by a company, the company gives the warranties, but the shareholders may also be asked to give warranties personally to reinforce the company’s warranties, especially if the company will have little substance post completion.
The scope of the warranties
The warranties are drafted by your buyer’s solicitor usually on the basis of information gained from due diligence. The warranties are usually general, wide and as far reaching as possible.
Limiting the warranties
Because of the effect of the warranties, we will try to limit your exposure by deleting those warranties which are not applicable, qualifying some warranties ‘so far as the seller is aware’ and drafting specific limitations on your liability.
Typical limitations include:
- limiting the amount of any claims that can be brought by your buyer to a maximum sum (very often the purchase price);
- limiting the timescales within which a claim must be brought;
- excluding small claims;
- forcing your buyer to do what it can to reduce any loss it has suffered.
If your buyer knows about a potential liability you may be required to indemnify them against any loss. An indemnity effectively provides pound for pound compensation for your buyer’s actual loss for breach. If there is no indemnity, then they could sue you for breach of warranty and their claim would be subject to all the restrictions under general law on claiming damages for breach of contract.
A number of consents or approvals are likely to be required on an asset sale, for example, if a business occupies leasehold property, the landlord’s consent to an assignment will be required. We can support you in the review of all important contracts of this nature and beyond, as they may require the consent of the other party to an assignment.
Apportioning the price between the assets
You should always take your accountant’s advice on the apportionment of the price as between the various assets being sold so that the tax consequences are fully understood.
When your business is sold, your employees transfer to your buyer on their current terms of employment. This is the effect of TUPE (Transfer of Undertakings (Protection of Employment) Regulations). Generally, you will be liable for claims regarding any failures in respect of employment obligations to employees up to completion and your buyer for anything after completion. As this is a complex and fast changing area of the law a seller will need advice from our Employment Team on the way as TUPE may impact on the sale.
If a property is being purchased you will need to take advice from and involve a member from our Commercial Property team.
This is a very important document as it lists any exceptions or inaccuracies in the warranties, for example you may be asked to warrant that ‘the company is not involved in any litigation’. If in fact it is, the details should be disclosed, with all the disclosures collected together in a ‘disclosure letter’.
The disclosure letter protects you because if you disclose anything inconsistent with a particular warranty, you cannot be sued for breach of that warranty.
These are the copy documents which relate to any matters disclosed in the disclosure letter. In the example given previously, these could be copies of the court papers and correspondence concerning the dispute which led to the litigation.
We appreciate there will be many elements to consider when selling your business, and we have many years of experience helping people achieve their goals for their business sale efficiently and keeping you at the centre of the process. To discuss your business sale with a member of the team, contact us:
Steven Grant on 023 8071 7445 or email firstname.lastname@example.org
Naushad Rahman on 023 8071 7409 or email email@example.com