Selling a company: everything you need to know

One of the best pieces of advice we can give you is to simply be prepared.

Adam Kerr | Managing Partner

By Gary Black, Partner and Head of Corporate and Commercial

Selling a company is one of the biggest and most important decisions you will make as a business owner and is not something you should take lightly.

There’s a host of reasons why you may decide to sell your business, from wanting to make a profit, to retirement, or for no other reason than not wanting to be in charge anymore! Whatever your reasoning, it’s important to understand what you’re getting yourself into, and know what processes you should follow.

But what exactly are these processes?

Be prepared

One of the best pieces of advice we can give you is to simply be prepared.

Selling a business is a fairly complex process, which involves various different stages and legal requirements. It’s important to make sure you have all your ducks in a row, for want of a better phrase, and start off on the right foot.

1.     Clarify what is being sold

The first step in selling your business is clarifying that you can actually sell it.

As sole director and shareholder of a private limited company, you have the right to sell your business, including any and all of its assets you no longer want to own or manage. However, if you are part of a group of shareholders, you cannot sell the business without their approval. In this instance, what you can do is sell any shares you own yourself and resign as director.

The second step is to consider is to understand what happens when you sell your shares.

As the owner of a limited company, you can sell the shares of the business. When these are sold, the buyer purchases everything the company owns – including all assets and liabilities, such as accounts payable, loans and salaries.

As all company assets are transferred after the sale, the buyer will want to investigate the liabilities before completing the deal.

2.     Get your business valuated

It’s important to know how much your business is worth so you don’t go into any potential negotiations blind and over or undersell it.

Putting a number to your company’s worth, however, is actually quite a challenging process and isn’t simply just crunching a few numbers. A thorough business valuation considers:

  • Current profitability of your business
  • Your assets
  • External reputation
  • Sales history
  • Business forecasts
  • Relationships with both clients and employees
  • Retention rates
  • Any potential risks for the buyer

It’s important to seek expert advice when valuing your business so you don’t sell it for less than it’s worth.

3.     Undertake Due Diligence

Before any business deal or agreement, both parties should undertake due diligence and examine the company and any financial records in detail.

As the seller, you don’t want to sell your business to just anyone who claims they can afford it. You should do a credit check on any potential buyers and carefully verify any legal documentation. It’s also worth paying close attention to their character, to simply check if they’re the type of person you’d like to sell your business to.

Consider legal advice/support

Processes such as business valuation and due diligence are complex matters, but of paramount importance. They are essential to the sale of your business and you should ensure they are done correctly and with enough detail.

This could involve seeking professional help, turning to an accountant for your business valuation or one of our expert lawyers for support with due diligence.

Additionally, selling your business involves various legal requirements and tax obligations that may be challenging to those not trained, but second nature to corporate lawyers.

After selling your business there are various procedures you must follow and hoops you’ve got to jump through, including:

  • Notifying Companies House
  • Updating all registered details, including shareholders, directors and secretaries
  • Informing HMRC
  • Transferring your VAT registration number, if you’re VAT registered

Although the Government’s website is a good starting point to understand your responsibilities when you sell your business, turning to a insolvency lawyer may be the more simple option. We are long rehearsed in the art of selling a company and know the correct (and legal) way to do it.

Furthermore, the actual process of selling your business involves various stages where having a legal input is definitely a bonus. There can be many negotiation stages and different contracts that need drafting, which would all be made easier with the support of a professional.

Selling your business

The final stage is to sell your business. While this is a fairly lengthy stage, it can be divided up in to four simple steps.

1.     Find your buyer

Step number one in selling your business is finding your ideal buyer. Having completed all valuations and due diligence, you will understand the type of buyer and value of offer your company deserves.

To find your ideal buyer, companies often produce a Memorandum –a brochure used for selling your business. This is distributed with any potential buyers to gauge for interest, only revealing your company’s identity when the interested party has signed a non-disclosure agreement.

2.     Agree your terms

The next step is to agree the Head of Terms: a legal document which outlines the purchase price and structure of the deal, sometimes including expectations about the legal terms of the deal.

The Head of Terms outlines how and when the buyer will pay, including if the transaction is a share sale or asset sale.

3.     Negotiate the Sale Agreement

Next up, the buyer’s lawyers will draft either a Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA), depending on which structure you choose. You and your advisors then review this document, often leading to negotiations.

This process can often be time-consuming, because, as the buyer does their own due diligence, they may find reasons to alter their offer if they find any unexpected issues.

4.     Completion

Eventually, after many rounds of negotiation completion day will arrive. On this day, all documents are agreed in their final form and are signed by all parties involved.

The final step is the money arriving in your bank account – and pouring yourself a well-deserved drink!

If you’re considering selling your business, make sure to get expert lawyer advice. Whether you’ve one hundred percent decided that you’re selling it, or simply want to understand a bit more about the process, don’t hesitate to get in contact with me at: gary.black@primaslaw.co.uk

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