But as this financial transaction could represent a whole lifetime of work, it is very important to do it right. Seeking sound professional advice and staying aware of the main legal issues around this are imperative to the process.
Firstly, the seller should employ a corporate finance adviser to help determine the value of the business. This is not a clear-cut task, as the value of a business is more than just hard assets, which can be fairly straightforward to price.
The value of a business is properly determined by assessing a range of tangible and intangible factors, such as the experience and skill-sets of existing employees, the location of the business, the physical appearance of the premises, suppliers, stock, equipment and customer lists.
The right adviser will be able to not only assess the value of the company, but will be able to assist in forming an exit strategy and will have good contacts to help find a buyer.
The seller should also seek the assistance of legal counsel who specialise specifically in these types of transactions. Business owners may already employ a legal team for corporate needs but they might not have the relevant expertise.
Interviewing a number of firms can ensure the right one is located so that all needs and requirements can be met. The seller should also obtain an estimation of what the legal fees will be for the transaction.
An auction process of selling is a good idea if there are already a number of interested buyers. If so, it is a good idea to put together an information memorandum. This document contains crucial information about the company and allows business owners to sell quickly to the highest bidder.
If no immediate offers are on the horizon, it is always a good idea to seek out the assistance of an investment banker. Legal and accounting advisors will be able to recommend investment bankers.
The business owner should understand the team who will be handling their transactions and have checked all references. Once an investment banker has been selected the seller should have the agreement fully considered by their legal counsel and ask that any tail provisions which may run post-agreement have been properly terminated.
Once a price has been agreed upon, the buyer should then be invited to sign a letter of intent. This is a non-binding letter that details the terms of sale and the intent to buy. The letter should also include a confidentiality agreement or a non-disclosure agreement.
Although these may seem like relatively straightforward documents they should nonetheless be fully considered by the respective legal teams. The business owner should ensure that the wording and precise duration of the confidentiality clause are clearly drafted and the consequences of any breach of its terms. As the buyer will very likely be a competitor, it is a good idea to withhold any business secrets until the buyer has signed the purchase contract.
After that, the buyer will have an opportunity to carry out a procedure called due diligence, which is an investigation of the company. The procedure is commonly held in a secure location called a data room facility, which the seller’s lawyers will be able to host.
The seller should be ready to showcase documents such as copies of leases, contracts, financial records, customer records, payroll and detailed lists of assets. They should also take this opportunity to conduct a thorough investigation of the buyer, including their creditworthiness, reputation and management abilities.
When both parties have finished their research, the buyer’s lawyer may compile a purchase agreement. This is a formal contract which will set out details such as what is being sold, asset allocations and indemnity provisions.
The selling of a business is a long process and any business owner should begin planning for it well in advance. When negotiating the purchase of a business buyers should not just focus on the profit to be made, but about the potential for growth and expansion of the business going forwards.
It is essential, therefore, to work with reliable and trustworthy people as well as experienced and committed legal advisers who will ensure that the business owner gets the best deal possible.
Alan Wolstenholme is an in-house barrister at Zaiwalla & Co Solicitors
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