GETTING READY TO SELL YOUR BUSINESS?

A considerable amount of work goes into preparing your business for sale and it all starts well before the sale agreement is signed and announcements are made. There are some key points which will need to be dealt with at an early stage:

• non-disclosure agreements (NDAs) should be entered into before you share any confidential information about your business with potential buyers

• decisions need to be made about how your company is valued

• a term sheet should be drawn up which sets out the key items that are agreed between you and the potential buyer

In addition, it is very much worth undertaking some pre-sale due diligence (maybe even before a specific buyer is in mind) which is discussed in this article.

Non-disclosure agreements (NDAs)

As a seller, it is important to enter into NDAs before any confidential information about your business is shared with potential buyers so that all parties understand exactly what the nature of their rights and obligations are.

NDAs are particularly important as they will protect your trade secrets, intellectual property, terms you have with key suppliers or customers and more.

A buyer will want to make sure it can receive as much information about your business as possible in order for the buyer to consider whether the business is actually worth buying. A buyer will also want to make sure it can distribute the information that you share to its advisors and internal employees, consultants and others who need to know the information in order to progress the purchase of your business. Legal advice will ensure that this type of dissemination of information is possible whilst continuing to protect your confidential information.

Valuations

Valuation advice is given by accountants and/ or corporate finance advisors (not lawyers) who will be able to discuss with you differing valuation methods which can then be used as a starting point for pricing your company. There may well be two phases to this initial valuation process:

• obtaining your own preliminary advice to determine if an exit at an acceptable price is likely to be viable, and the type of offers you should be expecting to receive; and

• evaluating and negotiating any offers –although ultimately most discussions around valuation will come down to commercial negotiation, being able to underpin those discussions with objective and informed insight is a powerful tool.

Also, valuations usually remain subject to the buyer’s due diligence.

Term sheets

A properly drafted term sheet usually indicates that due thought has been put into the sale or purchase of your business. An appropriately drafted term sheet considers what the key transaction documents should cover and the overall structure of the transaction and can lead to significant savings in time and legal costs because all parties have come to an understanding before the drafting of those documents has commenced.

Important themes to consider in a term sheet include:

- Purchase price

This is probably the first matter that comes to mind when drafting a term sheet. Hopefully the headline price will already have been determined at a preliminary stage, as previously outlined. But as well as that initial figure, it is also important to determine how the purchase price will be paid. Will it be paid in total at completion or deferred? Will there be a price adjustment to the headline price such as completion accounts or a locked box?

- Exclusivity

Buyers will likely push for exclusivity as this will stop the seller from negotiating with other potential buyers and/or continuing to solicit further offers for their business.

- Documentation

We know that there will be a share purchase agreement dealing with the transfer of shares (or asset purchase agreement dealing with the transfer of assets) from the seller to the buyer but sometimes other documentation is required too (for example, a service agreement if the sellers is staying on for any period).

Pre-sale due diligence

Spending some time and effort on getting due diligence material in order prior to a sale process commencing and anticipating the buyer’s legal requirements has many advantages. It helps you as the seller control the timing of the work necessary to collate information so as to minimise the disruption to management’s day job of running the business (i.e., ‘front loading’ the work). It also may reveal matters which should be sorted out now and/ or dealt with in the term sheet (problems which emerge after the deal is struck may not be accepted by the buyer without a significant reduction in price).

Think of it a bit like a medical check-up with the result of spotting legal risks early.

What the buyer will want to see will depend on the kind of business being purchased but as a minimum:

- commercial contracts (including employment): are they fully documented and up to date? How may they be terminated? Do they have unusual and expensive obligations?

- disputes: are there any? If so, what is the likely quantum, who is involved and what is the current stage of proceedings?

- real estate: have the usual information and documents to hand in order for the buyer to properly interrogate titles (this will often tie in with the position of secured borrowings which may be important to a purchaser with plans to gear the company more highly).

- intellectual property: if this is a key part of the business, a buyer will be keen to check very carefully that it is secure with appropriate registrations and documents. Gathering that information from trade mark and patent agents can take time and will be essential to aid a smooth sale.

How can we help

Rachael Taylor is a legal director in the corporate and commercial law team, advising on a wide range of corporate matters including mergers and demergers, the sale and purchase of private companies (including MBOs) as well as distressed/administration sales. For more information contact us or visit our website.

Rachael Taylor

director