5 Tips for Selling Your Business in England and Wales

Suppose you are a business owner. You have developed a good idea and worked hard to grow your business. However, you have decided to sell your business. This could be because you are looking to retire or simply because you no longer want to own your business. In any event, this can be a daunting process if you do not know where to begin and how best to prepare. This article will give you five tips for selling your business and what to expect throughout the process. 

This article assumes that:

• you have a successful business, not in considerable financial difficulty;
• you are selling a private limited company; and
• it will be sold through a share sale.

Business Valuation 

Before you can begin selling your business, you need to know what it is worth. Valuing private companies is more complex than public companies. Therefore, you will want to enlist the expertise of an accountancy firm or corporate financier. There are different ways to value a private company, and each will yield a different value. 

There are four main valuation methods you should be familiar with.

Finally, the buyer will conduct their own valuation of your company. Depending on the method used, the buyer may have a substantially different expectation of your company’s value.

Broker or Self-Negotiated?

The market for buying and selling private companies is considered relatively illiquid, meaning it is more challenging to match a seller with a potential buyer than if selling shares of a public company. 

Therefore, you may find it helpful to hire a broker. A broker is someone who has a good network of potential buyers and sellers and can connect you more quickly with a buyer. This can save you considerable time. 

A disadvantage of using a broker is that they tend to charge you a fixed percentage of the total purchase price, which can be substantial. Brokers are also not highly regulated, which means you should ensure you are hiring a competent professional. You may consider leveraging your business network for references. 

Preliminary Agreements

Before the transaction properly begins, both parties should negotiate three essential agreements. In practice, all three may be contained in the heads of terms, though not necessarily. 

It is vitally important that you seek legal advice before entering into any preliminary agreements. Depending on how you draft the agreement, certain terms may or may not be legally binding. This could have unexpected consequences. 

Heads of Terms

Heads of terms, also called letters of intent or memorandum of understanding, are similar to the agreements in principle you receive from mortgage lenders. In general, they contain:

• the price to be paid for the company;
• how the transaction will be structured, such as if it will be an all-cash sale or if there will be other kinds of payments; and
• the timeline of the transaction, including key dates.

Confidentiality Agreements

In the transaction, your buyer will gain access to sensitive information about your business. For example, your buyer will gain access to some of your trade secrets and who your customers and suppliers are. 

Therefore, it is common to require the buyer to enter into a confidentiality agreement beforehand. This is also known as a non-disclosure agreement.

Exclusivity Agreements

Whether you are a buyer or seller, the process is quite expensive. From the buyer’s perspective, they will not want to begin serious negotiations unless they are sure you will deal only with them. Therefore, they will likely ask you to agree not to seek out another buyer for a certain period. You should note these are also called lock-outs or no-shop agreements.

Preparing for the Due Diligence 

Once the preliminary agreements are made, the due diligence process (DD) will begin. DD refers to the process of the buyer investigating your company to understand all relevant details, including anything that might diminish the value of your business. 

DD can be broken down into the following categories:

• commercial;
• financial;
• legal; and
• tax.

You can help speed up the process significantly by assembling all the necessary information into place as early as possible. This includes:

• all contracts with any third parties, including suppliers and customers;
• service contracts for directors and other staff; 
• full details of your company’s constitution, including its articles of association;
• your company’s accounts and annual confirmation statements; 
• the shareholders and the number of shares issued as well as any shareholder agreements;
• directors’ details;
• any debts, liabilities, and financial obligations like mortgages, charges, and liens;
• details of any ordinary and special resolutions passed by the shareholders;
• any property leases and land owned by the company; and
• any on-going or expected litigation where the company is a party to a lawsuit or dispute. 

Share Purchase Agreement 

The share purchase agreement (SPA) is a document that records that a company has been sold. It also contains important details, such as at what price and how the parties have structured the deal. 

The most important terms of the SPA relate to the representations and warranties that you will make to the buyer. These exist to protect the buyer from certain risks after the sale has completed. 

You will also need to consider whether certain conditions need to be met for the purchase to be complete. For example, you may need to ensure there is sufficient shareholder support for you to sell the company. Therefore, the purchase will be conditional on securing the necessary shareholder approval. These are called conditions precedent. 

Key Takeaways 

Selling your business can be a complex and challenging process, but there are five tips you can use to prepare yourself better. These include:

• obtaining an accurate valuation of your business;
• considering if you should use a broker;
• thinking about the essential preliminary agreements you will enter into;
• preparing for the due diligence process as much as possible; and
• understanding the importance of the share purchase agreement. 

If you need help selling your business, our experienced business sale and purchase lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

Frequently Asked Questions