You think you’re ready to sell your business? Here’s what lies ahead.

You’ve worked hard, really hard for a very long time. You’ve missed soccer matches, violin recitals and lots of other important family events. Finally, you feel that your business is ready to sell and you can take the cash and head of happily into the sunset for a relaxed, better life.

All you need to do is find a willing buyer with enough money, sign off some simple documents and that’s it, you’re sorted and rich, right?

If only it were that simple.

The sale of a business (or shares in a company) is a daunting, time consuming, stressful and complex process for those who have never done it before and it is easy to see how it can become overwhelming for the unprepared.

Many lawyers love to tell war stories about difficult transactions which left a seller wondering why on earth they decided to go through it, the damage it did to their business, their emotional health and any desire to go through the process again, ever. However, with good preparation and a general understanding of what’s involved, this need not be the case. If you have a good business and somebody who wants to buy it, then there is a great chance that you may be able to get that new life you have worked so hard to achieve.

And we’re off…

At the outset, it is time well spent to draft and sign Heads of Agreement which accurately reflect what has been agreed between you and the buyer about the sale. It’s worth spending some time getting these right but be careful. This is NOT the agreement which will result in you getting your money so don’t overdo it. It is really little more than a useful guide for all parties to remember and refer back to as a reminder of what everybody is trying to achieve. That’s all.

Heads are not usually legally binding (although some specific clauses can be), but they can be very helpful to pull things back on track if they start to slip.

Due diligence — leave no stone unturned

Once the Heads are agreed, the real work starts with due diligence. As a seller, you must be prepared to gather together a LOT of documents and provide replies to a long list of comprehensive questions about your business. Don’t bother questioning or second guessing why you are being asked for certain information, just get your head down and reply as quickly, honestly and completely as you can.

This stage can be a real challenge for many, especially if you don’t want to disclose the transaction to staff within the business. When this is the case, it can be much more time consuming to deal with due diligence than if you can enlist the assistance of people working within the business and harness their specific and individual knowledge.

You may find yourself working late at night for a while after everybody has left and at weekends to try to keep the deal under wraps and moving forward.

If internal confidentiality is not an issue, it can work well to create a project team of senior staff members with clearly defined responsibilities for document disclosure and the drafting of replies to enquiries. This spreads the workload and can be very helpful if the timescale for due diligence is limited. Keeping a central online facility for retaining the documents and replies provided to the buyer along with careful and meticulous labelling will really help. Your legal team can help with this and you should really consider taking them up on this service — it costs but helps A LOT.

From the information you give during due diligence, the buyer will decide whether they want to carry on with the deal, if the price and payment structure are appropriate (from their perspective), and what warranties should be in the Sale and Purchase Agreement (“SPA”).

How many trees had to die for this?

Once due diligence is over and you and the buyer are happy to proceed, hopefully without the buyer trying to shave something off the price, the deal enters the execution phase. If a draft SPA has not already been provided (if it is prepared at this stage it is usually on the basis that it is subject to the results of the due diligence), the SPA and other documents (Service Agreements, Consultancy Agreements, etc) will be circulated between the parties to be reviewed, negotiated and amended.

The SPA can be a long and complex document depending upon the nature of the transaction and can be difficult to follow and understand. Expert legal help is a must.

These days many deals don’t involve all of the purchase price being paid at once. There can be earn outs or retentions for various reasons. As we have told clients many, many times before, there is nothing like cash on the nose. Any part of the purchase price not paid is at risk and may never be paid. Bear this in mind when negotiating the deal and push for as much cash as possible when the documents are signed.

Then there are the dreaded “warranties” which are promises from you to the buyer about many aspects of the business being sold. There will be general and (in respect of share sales) tax warranties about a lot of detailed elements of the business, its history, employment issues, accounting, litigation, etc.

It’s crucial that you take every opportunity to ensure that the SPA contains appropriate protections for you wherever possible. There are a couple of areas where you can greatly reduce your risk of a claim after the sale which will go some way to help you sleep at night.

First, make sure that the SPA contains “Vendor Protections”. These are limits that a potential claim from the buyer must meet or exceed before you can be sued for a breach of the warranties in the SPA. There should be a minimum financial threshold for any one claim, often an aggregate financial level for one or more claims (the higher the better) and a time limit after which no claim can be issued against you (the shorter the better). There is no set formula for these limits or timescale and your legal advisor will discuss this with you.

Secondly, your lawyer will prepare a disclosure letter and bundle of disclosed documents on your behalf. The purpose of this is to inform the buyer of any issues that may affect your ability to give certain warranties as they have been drafted (buyers are generally very resistant to changing the wording of warranties and would prefer to leave them as they are originally worded and for you as a seller, with all of your detailed knowledge of the business, to make a disclosure).

The disclosure letter will contain information about circumstances which you feel could amount to a breach of a warranty without the disclosure being made. The effect of this is that the buyer is deemed to have notice of the situation which prevents them from bringing legal proceedings against you on that issue. The importance of this stage cannot be stressed enough. Disclose everything which is relevant. The buyer may not like all of your disclosures and the disclosure letter often goes through a number of drafts before it is agreed but remember, if it ain’t in there, you can’t say “I told you so”.

There are other documents to look at as part of the deal such as board minutes, letters of resignation, forms for Companies House, etc. These will all be prepared and put together as part of the pack of completion documents to be signed.

Selling a business or shares in a company is a transaction like no other. It’s hard work and preparation together with a calm and efficient approach to the deal will help to make it a far better and less stressful experience with a greater chance of success.

Good luck.