How to Sell Your Business – The Legal Aspects

“Incorrect documentation is often worse than no documentation.” Bertrand Meyer

If you are looking to sell your business here are a number of legal tips for you the think about.

Getting the right lawyer

Selling your business is one of the most stressful and complex legal issues you are likely to experience in your lifetime, so it pays to get the right partner on your side for you and your needs.  

Pre-planning for a sale saves you time, money, and stress, especially the legal aspects.  Selling is not just about getting the right price; it also means addressing and mitigating any risks of future liability.  The day you handover the keys and get the cash is rarely the last day of your interest in the business.

The early stages of preparing your business for sale is the time to be proactive.  The best time to prepare is at the beginning of your business journey but I know from personal experience that there’s plenty of other things on your mind when starting out.  

You wouldn’t think to get eye surgery from a heart surgeon, and it’s the same with legal advice.  Getting advice from a niche law firm that understands the sale and purchase process means you have the confidence that you are getting the best possible advice.  This isn’t a job for your high street generalist solicitor.

A good M&A lawyer advises you well before the sale process is in progress so that you know and understand the journey you are embarking on and what is required in terms of documentation.  Too many business owners go into the process completely blind.

When finding legal advice, you need to check out how many transactions they’ve been involved with and that they have current knowledge, know-how and experience.  This helps you structure the best deal for you AND get it over the line.  Many sale transactions start but never complete because of lack of preparation or understanding of the process.  

A deal may involve anything from a complex share sale to a simple transfer of assets.  Getting the right level of support is critical to manage every aspect of the transaction and avoid you getting distracted from the business quickly and efficiently.  

“Common sense often makes good law.”

William O. Douglas

The Legal Documents for selling your business

There are a lot of legal documents involved in a business sale. It is important that the legal documents are well drafted when you sell your company.  It is wise to familiarise yourself with the documents and the process involved before starting the process.

Before you even think about selling your business, having a shareholder’s agreement in place is one of the essentials (in my opinion).  A shareholder agreement regulates decision-making for the shareholders including voting rights, lock-down provisions, restrictions on transferring shares, or granting security interests over shares as well as “tag-along” and “drag-along” rights. All these rules ensure that everyone who is a shareholder is clear on what happens to the shares of the company should anything happen to one or more of the shareholders.  

A shareholder agreement stipulates how a business ownership gets transferred and how the process is triggered.  Setting this out in advance means all shareholders understand what’s going to happen when the conditions are right for a sale process. 

Before you disclose any information, you engage with a 3rd party on a confidential basis and the first document you share is a Non-Disclosure Agreement (NDA).  This ensures that all information you provide to a potential buyer is kept confidential.  When the potential buyer is a competitor extra care is required.  Sometimes this document is also called a confidentiality disclosure agreement or confidentiality agreement.

If you are using a broker or corporate finance advisors then you sign an eEngagement or mMandate letter, which sets out the agreement between the selling parties and the advisor.  This gives the details of expected fees for work done including any success fee, exclusivity arrangements and milestones for the sale project. 

Before you get to the Sale and Purchase Agreement (SPA), the first “contract” step in the selling process is the offer from the potential buyer.  It’s often called Heads of Term (HoT), a Terms Sheet or a Letter of Intent (LOI).  The document is typically not legally binding and provides clarity to both sides with what’s been agreed in principal and the intentions of both parties.  It can be partially or fully legally binding agreement and, when it is, it shows much more commitment from the buyer. Be clear if it’s legally binding with explicit wording in the document.

“Common sense often makes good law.”
William O. Douglas

The HoT or LOI is put in place before the due diligence phase has started. In essence it’s the template for the detail of the deal that allows both sides to move forward into the next steps.   A Heads of Terms often has several versions until both parties are agreed.  

This is the time to ask lots of questions and not make any assumptions. If in doubt, ask because this is the stage at which misunderstandings can be cleared up rather than create expensive problems later in the process.  Whilst it is the buyer who prepares the term sheet, the details need to be agreed by both parties.  It’s a two-way process to make sure the seller knows what the buyer is expecting to buy and vice versa.

The “sale” contract is called a Sale and Purchase Agreement (SPA) because it is a joint contract between the parties who are selling and buying.  It’s comprehensive and includes provisions for holding back funds or getting funds back if something goes wrong.  It’s the final step of selling a business and is undertaken by the buyer and their legal advisors.  

The contract includes the sale of shares, the price, any withheld amount (including reasons and how the withholdings are released), taxes, warranties, limit of liabilities of the sellers and indemnities. Getting the right lawyer pays dividends at this point because they ensure that crucial items like any earn-out, non-compete or tie-in periods and the commitment to warranties or indemnities are structured to suit you. Sometimes it’s years after the business sale that these legal items come back to haunt you if you are not properly protected.

An additional part of the sale documentation involves regulations such as employment protection i.e., TUPE (transfer of undertaking and protection on employment) and searches related to property.  You may also be required to acquire contract assignments, transfers for leases and property through the Land Registry.  Who is expected to pay the associated legal fees on this activity is included in the HoT.

Your employees are legally entitled to have their employment contracts transferred.  You can’t just make some of them redundant before a transaction to get the headcount down at the request of the buyer.  Equally their terms and conditions cannot be materially adversely altered after the transaction either.  If you have employees that shouldn’t be working in your business, then act before the sale process or pay the price in reduced sale value.

And don’t forget about restrictive covenants.  These are the clauses that prevent you from taking certain actions after the sale such as setting up in competition for a period afterwards.  Poaching staff often comes into play here too.

It might feel that you’ve got to the end of the paperwork mountain and then another piece of red tape is needed to be unlocked.  Take heart that it does eventually come to an end.

Are you stuck in the day-to-day of your business with no time to plan for the future? A Professional Business Mentor is just the leverage you need to get out of the rut and flying. Discover how you can make your business worth more AND avoid leaving money on the table when you finally leave your business. Click here to contact Christine by email alternatively you can book a call with the Business Mentor of the Year 2020, author and speaker. Who helps business founders get their businesses exit ready so they can enjoy a happier, richer future.  She saves them THOUSANDS and increases the value of their businesses by MILLIONS.