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One fact of life is that nearly all business sales involve significant time, effort and paperwork. Why? Because business sales involve lengthy negotiations and the transfer of significant value and liability. To protect both parties, these terms must be recorded in adequate legal documentation, which is often complex. This article will explore three significant benefits of using a lawyer to sell your UK business.
Understanding the Sale Process
The majority of UK business sales will involve:
- valuing the target business;
- marketing the target business to prospective buyers;
- facilitating the buyer’s due diligence;
- negotiating the purchase price and transaction structure;
- drafting the sale-purchase agreement; and
- executing the agreement and actioning any condition precedents.
Using an expert lawyer from the start to the close of this process has multiple benefits. We will now explore three significant advantages below.
Attaining a Reasonable Sale Price
No business owner wishes to sell their company for an undervalue. It is, therefore, vital to ensure that you utilise the most suitable valuation method for your business. Along with a corporate accountant, a corporate solicitor can help you choose the best business valuation method. The following are the three most common methods:
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Asset valuation method |
This calculation method values a company’s physical and non-physical assets and offsets liabilities. Physical assets tend to include stock, machinery and vehicles, whilst non-physical assets can consist of Intellectual Property (IP) and goodwill. Similar principles apply when valuing liabilities. |
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Income valuation method |
This involves a thorough analysis of the company’s income and cash flow. The sale price generated through this method will follow consideration of the company’s pricing, sale figures and predictions of future profit measured against the buyer’s expected return on investment. |
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Market value method |
This calculation method compares your business to local competitors. For example, a car garage in Newcastle is likely to be compared to local garages within a five-mile radius. Those businesses’ average income, expenditure, and profit figures generate the sale price. |
Unsurprisingly, picking the wrong valuation method can result in a much lower sale price. If your business is bringing in a lot of profit and income but has little in the way of assets, using the asset valuation method would be disastrous!
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Navigating the Negotiations
A lawyer’s value is perhaps best demonstrated by their expertise within contract negotiations. A slight difference between two similar pieces of legal wording can potentially cost you tens of thousands of pounds. This is because every word in a business purchase contract (or the absence of any specific terms) is crucial to its legal meaning.
Additionally, an expert lawyer can help you appreciate whether the terms of a written draft contract are reasonable or unfair. A good lawyer can then negotiate any required changes on your behalf using a firm but fair bargaining approach. Many business owners may note that lawyers tend to avoid ‘take it or leave it’ tactics (unless there is little choice) and, instead, utilise professional negotiation methods.
The art of negotiation is primarily gained through experience rather than considering written materials, so an expert lawyer tends to have an automatic advantage in contract negotiations.
Drafting and Execution
Most business sales involve a large amount of legal documentation. Whilst the recommended legal documents will vary depending on the nature of the company, most business sales will involve the following two examples:
- Business Sale Agreement – this is the crucial contract transferring the business from one owner to another. Importantly, this contract contains the specific terms and conditions of sale, including information as to the sale price, transfer date and assets included within the sale; and
- Confidentiality Agreement (non-disclosure agreement) – most potential buyers negotiating a potential business sale will agree to confidentiality wording. This document seeks to restrict the prospective buyers from discussing the existence and nature of the sale negotiations, most notably from other businesses and the general public.
Having an expert lawyer prepare and negotiate these contracts is crucial. In the case of the Confidentiality Agreement, experiencing a leak of the details of a potential deal can sometimes cause financial damage or result in it falling through. Robust Confidentiality Agreements may therefore contain a clause establishing possible compensation should one party breach its terms.
The Business Sale Agreement is even more critical as, essentially, this is the document that gives the business sale a legally binding status. Any significant error within this document could risk the sale or result in an unfair transaction.
LegalVision’s Buying a Business: Guide to Negotiating Terms allows you to protect yourself by understanding which key terms to negotiate when buying a business.
Key Takeaways
Negotiating, drafting and agreeing on business sale documentation is crucial to selling a UK company. Because of this, most business owners instruct an expert lawyer without hesitation. Overall, attempting to perform complex legal transactions without specialist legal advice is a considerable risk in deals worth thousands or tens of thousands of pounds (or more).
If you need assistance selling your UK business, our experienced business sale 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 on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
This is usually due to the majority of their content being written in a legal style. However, our legal system values certainty, which generally requires commercial contracts to contain formal ‘legalise’ wording.
This is highly unusual, particularly if the lawyer works for a private law firm (rather than in-house). The relevant business owner should sign important business transaction documents.
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