Kerseys can assist business owners in their business transactions and services including:
You have operated your business through a company and you are now going to sell that company.
Selling the company in these circumstances will almost always be a better option for you as a seller, but it is also riskier for the buyer than buying the company’s assets and business. This means the buyer are their lawyers and accountants will want to take a good look at the company and its business before they buy it, it also means they will want as many protections as they can get in the documentation the two of you agree.
Selling a company will generally therefore be more complicated than selling a business, so, we think, it helps if you know at the outset what to expect. The process can be broken down into three main parts or aspects, with a further optional fourth stage at the outset.
There will probably always be emails, but it can be useful if a more formal outline of the terms of the deal – a heads of terms – is produced at the outset. This is optional, but it helps to avoid misunderstandings later on, which could delay or frustrate matters.
Heads of terms are non-binding, but they have a kind of moral force. This means that if either side wants to go back on the heads of terms they really need a good reason for doing so.
The heads of terms may be something that the buyer and seller have put together themselves, or it could be a more formal looking document prepared by your buyer’s solicitors. They are optional but if you agree them, it is important that they do, in fact, reflect what you have agreed informally.
The first stage proper involves what is called due diligence. It is all about the buyer trying to find out more about the company they are buying and its business. They and their advisers are going to have lots of questions for you about them, and they will expect you to provide answers to these.
Some sellers find this a bit of a pain, but generally the more information you are able to give them, the easier you can make the process for the buyer, the more confidence they are going to have in what they are buying. If you can answer their questions quickly it suggest the business is well run, and you have nothing to hide.
The second stage involves the negotiation of a Share Purchase Agreement and other documents. The Share Purchase Agreement is an agreement between you, the sellers, and the buyer of the company. It is generally quite a lengthy document. Even on modest transactions you can expect it to be 30 to 40 pages long. The buyer’s solicitors will prepare this and, as your solicitors we would review what they have prepared, discuss it with you, and negotiate it with them. It is common for this agreement to go through several versions and several rounds of negotiation.
The Share Purchase Agreement will cover the payments to be made to you and how they are to be made, but also a number of other matters. Most important among these are the warranties. These are statements which the buyer will ask you to make about the company and its business. The warranties will cover things like the company’s assets, its accounts, its contracts and also some tax related matters.
The warranties will need very careful consideration because the buyer will be relying on them and, if any of them turn out to be untrue, the buyer may have a claim against you for a breach of warranty. This means they might then be entitled to the return of part of the price they have paid you.
As your solicitors we would carefully review the warranties with you, and having done so we would prepare what is called a Disclosure Letter. The idea of this is as follows. It allows you to set out all the exceptions to the warranties – all the things that make them untrue- and, if you do this, to avoid liability for what would otherwise be warranty breaches.
So, for example, the company might have some contracts that can’t be terminated on short notice, but the Share Purchase Agreement might include a warranty to the effect that the company has no contracts that can’t be terminated within a period of 3 months. For you to avoid any liability for a breach of this warranty, we would need to include details of these contracts in the Disclosure Letter. If we do this then the buyer won’t then be able to claim against you because that warranty is untrue.
Generally the Disclosure Letter will also incorporate a large bundle of documents (usually on a CD Rom) which will include documents you have already shared with the buyer as part of their due diligence, and other documents relating to the warranties and your disclosures. This is called the Disclosure Bundle.
The buyer and their solicitors are also likely to want you to agree a Tax Deed, sometimes called a Tax Covenant. As its name suggests this deals with tax matters.
We will need to work closely with your accountants or other financial advisers on this and on the warranties related to tax and the company’s accounts.
Unlike on a property transaction it is generally easier if exchange and completion take place at the same time without any gap – so you sign the Share Purchase Agreement and other documentation and then complete the sale of your shares in the company immediately afterwards.
We will need to finalise the main documentation – the Share Purchase Agreement, the Disclosure Letter and the Tax Deed – but completion of the sale will also involve various other processes and related documentation. This will cover among other things:
On the sale of a company, the Share Purchase Agreement may also stipulate that accounts should be drawn up immediately after completion, with potentially some adjustment to the purchase price – up or down – depending on the net assets value of the company (or perhaps some other factor) at the time of completion. If the Share Purchase Agreement does this then this will need to be sorted out after completion, but these accounts are generally something left to the seller’s and the buyer’s accountants to agree.
If you were going to instruct us we would need to take your detailed instructions and understand more about you, the company and its business. We would then give you an estimate of our fees. We may also be able, to give you the option of a fixed fee.
For us to give you an initial indication, however, you might like to let us have answers to the questions set out in the attached question sheet. This will help us to understand the deal, and to think about what will be involved. But, if you would prefer to discuss matters informally, then please feel free to call us. We are always happy to talk through the process.
The purpose of these questions is to help us give you the best indication of the costs of the transaction. Please answer them as well as you can.