Posted: Wednesday, 8 September 2010 @ 10:29
When preparing to sell your business, it is crucial to take the right advice as this can have a big impact on the success of the sale, the amount you receive and any ongoing liability following completion.
Here are 10 reasons why it is essential to use a good solicitor when selling your business:
1. Share or asset sale
The two main methods of structuring the sale of a business are to dispose of the shares or the assets. The two are fundamentally different but a solicitor will be able to advise on the advantages and disadvantages of each from a legal perspective.
Without proper legal advice, it’s all too easy to end up transferring the assets of the business whilst still being responsible for all contracts that the business has entered into. This would leave a situation where you end up having to pay suppliers for goods and services rather than the buyer.
It’s also essential to take tax advice on the most effective structure for any business sale.
During the sales process, the buyer will have access to a large amount of information about the business, which you might want to keep confidential. A solicitor can draft a binding agreement preventing the prospective buyer from disclosing this to any other party.
The types of information that a buyer will see are customer lists, full accounts (not just those available at Companies House), prices, profit margins and marketing strategies. If there is no confidentiality agreement in place and the deal falls through, you will be powerless to stop the buyer from using that information to gain a big advantage in competition with you.
3. Exclusivity agreement
The buyer may want a period of exclusivity to complete the purchase. Your solicitor should negotiate this to ensure that, once this has expired, you can negotiate freely with other parties.
If you are not represented by a solicitor, then it is likely you will be locked in to negotiations with one party for a long period and, if another buyer offers a higher amount for the business in the meantime, it will not be possible for you to accept this.
4.Heads of terms
Once a sale is agreed in principle, it is normal for the main terms to be set out in writing, called ‘heads of terms’. Your solicitor should be asked to review these at the outset, as it can be much more difficult to renegotiate terms later on in the process.
Heads of terms are not usually legally binding although there are circumstances where they can be. You could be devastated to find that, although you intended to sign a preliminary agreement and continue to negotiate the details, the heads of terms actually constituted a legal contract. In such a case, the buyer can force you to sell even if you later decided not to go ahead.
5. Due diligence
Once the heads of terms are signed, the buyer will start the process of ‘due diligence’ where the buyer obtains all information relating to your business. This is a very lengthy and laborious process, and a minefield for the unwary. To attempt to deal with this without the assistance of a solicitor is a very risky strategy that could affect both the sale price and cause problems in the future if anything is missed.
Sellers are often surprised by the detailed information that the buyer and their advisors want to see. You may think a piece of information is unimportant and not check carefully enough before providing the information. If you do this, you could find that after completion, the buyer sues you for ‘non-disclosure’ or ‘misrepresentation’ claiming huge losses and forcing you to incur heavy legal fees. You will end up having to pay back a chunk of the sale price to the buyer or in court costs.
Various approvals will be required for an asset sale. For example, if there is a lease, the consent of the landlord will be required to assign to the buyer. A good solicitor will identify at an early stage if any 3rd party approvals are needed and ensure they are obtained in good time before completion of the sale.
If you cannot get consent to assign the lease of the business premises and sold the business anyway, you could end up having to pay the landlord rent for the rest of the lease and to repair the property instead of the buyer.
7. Purchase agreement
Traditionally, it is the buyer’s solicitor that will produce the first draft of the purchase agreement, which will naturally be very much in their favour. It will then be for your solicitor to check this and make any amendments required to protect your interests. If you choose not to use a solicitor, there is a very real danger that it will contain unacceptable or onerous conditions.
It is not uncommon, for example, for a buyer to include conditions in the contract that allow it to withdraw from the deal at the last moment without penalty. You will then be left to pick up the pieces and the costs that you have paid out during the sale process.
8. Warranties and indemnities
Purchase agreements generally include a list of promises that you give called ‘warranties’ and ‘indemnities’.
For example, the buyer will insist that you give written assurances that all of the information supplied is accurate and that you have a good and marketable title to the assets (i.e. own them outright). In addition, the buyer may require an indemnity to cover the costs of certain future liabilities of the business (i.e. promises that you will pay these). Your solicitor will look to put a limit on any claims that can be made by the buyer following completion.
An example of an indemnity to watch out for is where you agree to pay any future costs for contaminated land. You might not be aware that you have agreed to pay what could easily run to £½ million or so, but your solicitor would certainly look out for potential liabilities such as this.
A ‘disclosure letter’ is put together by your solicitor. It is a very important document, as the letter qualifies any warranties you give in the purchase agreement. The effect is that the buyer will be unable to take any action against you in relation to the general and specific issues disclosed in the letter.
You might not know what needs to be included in the disclosure letter and will, as a result, be left exposed. Take a situation where the purchase agreement includes a warranty that the business is not involved in any litigation. If there is actually a dispute with a customer, the buyer will look to you for recompense following completion to cover any costs.
10. Post sale restrictions
The buyer will want to protect the business it has purchased and will look to include restrictions on you that fall into three basic categories. These are non-solicitation of customers, non-solicitation of employees and not to compete with the business.
Your solicitor will ensure that these are reasonable. Otherwise, you might be faced with a claim for a court injunction to stop you working for another company and not be able to earn a salary, and this could involve you having to pay a 5-figure number just to defend the claim.
The examples in this blog are worst case scenarios but they do happen regularly. Some people, when coming to sell their business, will take the view that a solicitor is an unnecessary expense. This could not be further from the truth as a good solicitor can help maximise the sale price, make the process much quicker and stress free and ensure that the seller is not left at risk of being sued after completion.
For advice on buying or selling a business contact Cousins Business Law.
Blog by Gary Cousins
Gary has been providing legal advice to shareholders, directors and business owners for over 25 years. Specialising in dispute resolution Gary is based in Birmingham with clients throughout the UK and overseas. View profile
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