Business Sale Agreement | Franklins Solicitors

Now you know what is involved in selling your business, you know how important it is to have the right team around you to guide you with each element of your transaction and ensure the best outcome for you.

Who is involved in the transaction?

The team that you need to sell your business will vary depending on the size and nature of the business. However, I would expect:

Solicitor – we can support you with each element of the transaction. We can provide initial advice on the structure from a legal perspective, draft your non-disclosure agreement to protect your confidential information and Heads of Terms, manage, assist you with and advise you on due diligence, negotiate and draft your governing documents for the transaction and assist you with preparation of your Disclosure Letter. We are there to support you at each stage of the transaction and have your best interests at heart.
Corporate Finance (CF) advisor or agent – they can help you craft the right deal structure for you and take your business to market in a discreet and confidential manner.
Accountant – your accountant is key to assisting with responses to tax and accounting enquiries and dealing with any purchase price adjustment mechanisms, warranties and tax covenants in the SPA and the implications for you from a tax perspective
Independent Financial Advisor – once the deal is done you need to consider how best to invest that money to protect your future. An independent financial advisor can assist with this and we would advise you get them involved at an early stage so that they can assist you with ensuring the deal structure and price is right for your future needs.

Selling your business is a big step to take. Before moving forwards with this, make sure that you have the right team around you to support you with each stage. At the end of the day, it needs to be a team that you not only Trust but that you get along with. After all, there will be a lot of hours, calls and meetings required to get the deal done and having a supportive team that you can call on and talk to on a frank level is essential to reach a positive outcome for you.

Please do get in touch with Holly Threlfall or the team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

Every transaction, whether a share sale, business sale, management buy-out, merger, share scheme (the list goes on!) will be governed by legal documents. These are essential to governing the relationship between the parties and sets out what has been agreed. This is important not only in relation to any ongoing matters between the parties post-deal, but also to any third party onlookers who may need to know about the transaction (in particular, HMRC).

What documents are included?

The actual documents that can be expected will vary between transactions, depending ultimately on the deal structure you are agreeing and what you have to sell. However, typically these may include:

Pre-Transaction Heads of Terms and NDA – these are designed to set out the headline terms of the deal and protect your information during the disclosure process.
Purchase Agreement – this will govern the operative terms of your transaction including the purchase price, when this is due and the warranties and assurances that you will be required to give the buyer as a part of the transaction. It may also include a tax covenant and a mechanism to adjust the purchase price based on performance.
Disclosure Letter – this is a formal letter from a seller to a buyer setting out any facts or circumstances which contradict a contractual warrant being asked of them. Where something is properly set out in the Disclosure Letter, the buyer acquires the business in that knowledge and cannot then claim against the seller in respect of that issue.
Service Agreements and Settlement Agreements – if you are also an employee of the business, it may be that your employment needs to be terminated on completion. Similarly, if you are going to continue to provide services post-completion then you may require a service agreement to govern this relationship.
Property Transfer Documents – if there is going to be any change to property ownership in the transaction, you will need documentation to deal with this. This may include a TR1 and contract for sale if transferring the freehold or registered lease, or a Deed of Assignment and Lender Consent if transferring a lease. This is particularly key if undertaking a ‘business sale’ or ‘asset transfer’
Contract Assignments – you may need to transfer rights or obligations from one party to another as a part of the transaction, particularly if a ‘business sale’ or ‘asset sale’. This can include assigning intellectual property, goodwill or even contracts with customers or suppliers.
TUPE Notices – if you are undertaking an ‘asset transfer’ or ‘business sale’ and have employees, you will need to notify them in accordance with their statutory rights and your statutory obligations.
Ancillary Documents – in addition to the operative purchase agreement, you may also need various ‘ancillary’ documents to effect the transactions it anticipates. This would include stock transfer forms, board minutes for any companies involved in the transaction, resolutions that are required to be passed, powers of attorney and indemnities for any lost/unissued share certificates, directors consents and resignations and notices for changes of persons of significant control. What you actually need will vary on each transaction.
Companies House returns. If you are selling a company, there are certain returns that need to be filed at Companies House within statutory deadlines.

Who is involved in this process?

Your legal team is key to drafting, negotiating and amending these documents. The buyer and seller have adverse interests in a transaction and therefore it is important that you appoint an independent solicitor to advise you in the sale and negotiate the documents on your behalf to ensure that they also include adequate protections for you as a Seller and that you are fully informed of the risks of proceeding. They will also work closely with your accountant and other advisors to ensure that they also account for any tax or accounting elements that need to be accommodated.

If you want to know more about the process of selling a business and how we can support you…please do contact Holly Threlfall or the team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

So you’ve found a buyer and agreed Heads of Terms, now it’s time for the hard work to begin! From my experience, the most commonly underestimated work-load in the transaction is legal due diligence enquiries. Accounting and Commercial due diligence often starts at the Heads of Terms stage as the buyer uses basic enquiries and a combination of assumptions to reach a price they are willing to pay in principle. However, before actually proceeding they will want to know everything about how your business operates.

What questions are they likely to ask?

Legal due diligence will vary depending on the nature of the business, size of the transaction and how the deal is structured (there is usually reduced due diligence for a business purchase as compared to a share purchase, but this isn’t always the case). Typically, legal due diligence covers the following topics:

Corporate Structure and Records – this is the background to your company, how it is set up and managed, what it’s governing documents consist of and compliance with statutory registers and records.
Share Capital and Shareholders – this is crucial in a share transaction and will enquire into who actually owns the shares being sold and any matters that may impact those shares.
Accounts and reports – this covers the Company’s historic statutory accounts, practices and management accounts since the last statutory accounts. It also considers any forecasting or budgets and changes since the last accounts date.
Finance and Banking – this is designed to gather information in relation to the financial facilities available to the business or needed to operate it (e.g. credit cards, overdrafts, grants, long-term loans, invoicing or other facilities) and even without any of these at the very least the bank accounts the business uses and cash in the bank.
Business, contracts and trading – this section is fundamental in any transaction as it covers the contractual arrangements that the business has and needs to trade. Crucially, a buyer needs to know about any material contracts and ensure these will continue.
Assets – this covers the equipment, plant and machinery the business needs to operate. It can also extend to stock levels.
Real Property – this covers the premises used to operate the business from and captures information regarding leasehold and freehold interests. It is common for this to extend not only to basic questions to understand what there is but appropriate Commercial Property Standard Enquiries (CPSE’s) in relation to those premises.
Intellectual property – this covers what intellectual property is used by the business, who owns it and any licences required.
Information Technology – this covers the computer systems used in the business, their maintenance and any vulnerabilities. This has become particularly crucial in recent years with the growth of cyber-attacks.
Data Protection and privacy – this is geared at compliance with strict statutory obligations in relation to how personal data is stored and processed. Particularly in view of the changes in GDPR!
Insurance – the buyer needs to ensure adequate insurance, the types of claims historically brought and any residual issues they may inherit
Regulatory compliance and consents – this is more key in businesses which are subject to a regulatory authority. For example those subject to FCA authorisation or SRA Registration. But this can also cover Premises Licences and Waste Carrier Licences. In effect, any governmental authority or consents required to run the business.
Litigation – any buyer will want to know about litigation that has been issues and which could impact the target they are acquiring.
Employment – employment law is a very niche topic and there are a whole host of laws which apply when you engage employees and these questions are designed to understand not only what employees are needed to run the business, but also ensure compliance with all laws. This can be particularly key in a business sale where ‘TUPE’ applies. If you want to know more about this, do contact our employment team who would be happy to help!
Retirement Benefits – just as employment law needs to be covered in view of the legal requirements to provide a pension scheme and auto-enrolment obligations any buyer needs to fully understand what has been effected and what their ongoing liabilities may be
Environment, Health and Safety – it is important for a buyer to understand about what health and safety procedures you have in place and environmental factors which may impact the business. In particular, what environmental and health and safety laws apply to the type of business they are acquiring and how they have been complied with. From cleaning products to storage of sewage tanks, the buyer will want to know what impact these have on your business.
Anti-Bribery and Corruption – There is strict legislation in place around bribery offences therefore a buyer will want to know what measures you have taken to prevent this.
Tax – compliance with tax legislation is important to any business and the buyer will want to understand not only how this has been dealt with historically, but the taxes due and any exemptions that have been applied. For example, capital allowances that have been claimed, some services or supplies are VAT exempt or sometimes R&D claims have been applied for. They will want to know this.

Who is involved in this process?

Primarily, you will be heavily involved in this process as you, together with your staff and managers, will know how the business operates and be gathering this information. Some of it, your accountant may also be able to assist with and we would work with you to manage the disclosure process.

How to manage this process?

Managing the due diligence process is daunting – particularly when you are trying to sell your business without any third parties (particularly staff, suppliers and customers) finding out about the transaction. This can therefore be one of the most stressful parts of a transaction. Technology can help with the provision of secured data rooms which makes it easier for information gathering and sharing but at the end of the day there is always going to be a fair bit of leg-work on your part! This can however be made easier if you plan to sell in advance of having a buyer lined up. We do offer a service where we can work with you to undertake this process with you before your buyer comes on board. This enables you to undertake due diligence at a manageable pace with less pressure. It also gives us the chance to review responses and advise on any potential issues we identify so that they can be rectified before you have a buyer. For instance, many companies don’t maintain statutory books which is a fundamental legal requirement and could cause an issue with your buyer.

For more information on our legal due diligence audit service and how we can help you prepare for a sale, please contact Holly Threlfall or the team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

What next?

Now we move on to preparing the documentation.

Once you have resolved to sell your business and decided on a structure that is going to suit you, the next stage is finding a prospective buyer and agreeing Heads of Terms. Taking your business to market can be a daunting process; especially as it is something many owners of private companies may only do once! But you are not alone in this process and the broker that has helped you construct the right valuation and deal for you can also assist in taking your company to market in a discreet and confidential manner.

Once you have found a buyer, the next thing you will need to agree are Heads of Terms.

What is the point of Heads of Terms?

Heads of Terms set out the principle terms of the deal that the parties are committing to negotiate. Generally speaking, they are ‘non-legally binding’ and should be drafted so that the majority of clauses (with a few exceptions) are subject to contract. Whilst it may seem unnecessary to negotiate an ‘agreement to agree’ the point of Heads of Terms is not to get into the devil of the detail for the transaction, but to outline the basic principles of the deal, timescales and responsibilities. After the Heads have been agreed, you then get into the due diligence stage of the transaction which will further influence what detail needs to be contained in the transaction documents themselves.

Why aren’t heads legally binding?

The majority of clauses in Heads of Terms aren’t legally binding as it allows:

The parties to incur substantive costs in the knowledge a deal has been agreed in principle
The parties to seek and further negotiate the terms of the deal when they have the benefit of responses to due diligence enquiries

What is in Heads of Terms?

As every deal structure is different, the provisions contained in the relevant Heads of Terms will vary. However, there are a few fundamental provisions that you would expect to find in Heads including:

a paragraph setting out the structure of the deal, the proposed purchase price and when this is due
an outline of the expectations in terms of due diligence enquiries
an outline of the expectations of the Purchase Agreement and who is going to prepare it
a legally binding confidentiality clause
a legally binding exclusivity clause
a legally binding costs and jurisdiction clause

What is an NDA

An ‘NDA’ or ‘Confidentiality Agreement’ is an agreement designed to protect both your information and the Company’s. It commonly involves:

an obligation to keep information secret; and
an obligation to only use information for a specific purpose.

This may be included within your Heads of Terms or you may have a standalone agreement. Either way, it is essential before proceeding that you have a comprehensive legally binding provision in place.

Who is involved?

Typically, the buyer’s solicitor would prepare the Heads of Terms for a transaction. That being said, your broker, agent or CF advisor may also commonly prepare Heads of Terms and certainly would be involved in considering and commenting on the purchase price, deal structure and how this is constructed.

If you have been presented with a set of Heads of Terms or need assistance navigating your sale, please don’t hesitate to Holly Threlfall or the team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

What next?

Once you have signed Heads of Terms, it’s time for the parties to move onto due diligence enquiries.

Preparation – as with anything else in life, preparing your business for sale is key. From preparing for the due diligence process to planning the sale structure and your exit plan, this is fundamental to maximise on your sale and prevent your buyer from chipping away at your purchase price.
Value your business and find a Buyer – A Corporate Finance Advisor can assist you with this process and finding the right buyer and structure for your deal. You should ensure that you have in place a comprehensive Non-Disclosure Agreement to protect your company’s information and know-how. Once you have found a buyer and agreed a purchase price and structure in principle, this should be documented in the Heads of Terms. These are largely non-legally binding but it is important to make sure the headline terms are agreed to prevent any protracted negotiations on your deal.
Due Diligence Enquiries – Your buyer will raise a series of questions about your business, its assets and historic trading position. It is important to answer these honestly and carefully to ensure that you are not exposed whilst ensuring the Buyer has sufficiently detailed information to assess the purchase. We can assist you with this process through management of a data room for you to provide your responses through.
Legal Documents – Your transaction will contain a series of legal documents from your sales contract (which may take the form of a Share Purchase Agreement or Business Sale Agreement depending on your structure) through to a Disclosure Letter and ancillary documents required to effect your transaction itself. These need to be carefully drafted and negotiated to ensure that you know what you are signing up to.
Completion – This is where all of your hard work pays off! Exchange and Completion is often simultaneous in these deals, so the point where you are legally bound is also the point where you hand over the keys to your business. Of course, in most transaction you usually receive the proceeds of sale (or part of it) and you can begin planning your next endeavours!

For all enquiries relating to the sale or purchase of a business, contact our expert Corporate team on 01604 828282 / 01908 660966 or email Corporate@franklins-sols.co.uk.

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