Selling your Business – Practical and Legal Considerations
Our corporate lawyers deal with numerous business sales each year, of many different business types, from various industry sectors and sizes.
Based on our experience, the following are key issues for owners considering selling their business.
Asset sale or Share sale?
There are 2 main transaction structures when selling a business, which are:
- a share sale (where the Buyer acquires the entire entity, containing all the assets and liabilities); and
- an asset/business sale (where the Buyer acquires specific assets from the business, and assumes agreed liabilities).
Generally speaking, Buyers often prefer to ‘cherry pick’ the parts of the business they wish to acquire so as not to take on liabilities and to buy via an asset purchase whereas most sellers would opt to sell the entire company as a ‘clean break’ from the company and its liabilities.
Business owners may be required to stay on in the business for a period post completion to assist with the transition and keep long standing customers and suppliers on side. With share sales, it is common for Buyers to try and negotiate an earn out so that the full purchase price is not payable on completion but delayed depending upon certain agreed future events and reaching financial targets.
It is important to note that the Seller is different under each type of transaction. In an asset/business sale, the company itself is selling the assets/business to the Buyer, whereas in a share sale the shareholders of the company are the Sellers.
Axiom DWFM can advise on the best transaction structure, taking into account your objectives and how best to protect your position.
Due diligence is a crucial stage for both asset/business and share sales. Buyers will require information about the business affairs to identify risks, minimise liabilities post-completion and potentially negotiate a reduction in the purchase price. Due diligence findings will then often lead to certain warranties and indemnities being negotiated into the transaction documents.
Axiom DWFM has the resources to collate due diligence documents, provide virtual data rooms, review the replies and documentation and assist with responses to legal due diligence enquiries.
The Legal Documents and stages in a business sale
Sellers should expect the following to be part of the process.
Heads of Terms
Heads of Terms are not always drafted and are not strictly necessary but can be useful as an initial document setting out the key terms of the transaction. Heads of Terms are part of the early stages of a negotiation to help facilitate and clarify discussions.
Binding aspects of Heads of Terms
Heads of Terms, generally, will not be contractually binding but certain provisions withing Heads of Terms may be expressly stated as legally binding and actionable. The most common examples are l confidentiality obligations a Seller should insist on from the Buyer before due diligence takes place and business critical information is made available to the Buyer. If the Seller and Buyer agree a period of exclusivity for the Buyer, this may also be given legally binding status.
The parties may decide to enter into a separate Confidentiality and/or Exclusivity agreement.
Where Heads of Terms are agreed, if either party subsequently seeks to change material aspects, this can lead to an early and sometimes complete breakdown of trust and the transaction may become abortive.
Share Purchase Agreement or Asset Purchase Agreement
This is the main document and contains detailed terms of the sale and purchase. Main terms usually include:
- purchase price mechanisms and payment terms;
- the assets to be transferred to the Buyer (on an asset sale);
- warranties and indemnities;
- limitation of liability on warranty and indemnity claims;
- post-completion restrictions; and/or
- specific provisions in relation to property, employment and pensions and intellectual property (where applicable to the business)
The disclosure letter is prepared on behalf of the Seller/s and addressed to the Buyer/s containing both general and specific disclosures and is usually accompanies by a disclosure bundle, to qualify any of the warranties given in the sale and purchase agreement.
Warranties and Indemnities
Where shares or business assets are being sold, there is no automatic protection for the Buyer. The Buyer will therefore seek contractual protections in the sale and purchase agreement, such as an extensive list of warranties. Warranties and indemnities are often the most contentious part of the final negotiations once the basic sale terms are agreed and lawyers instructed.
Warranties and indemnities form a crucial part of the sale and purchase agreement. A warranty is a statement of fact about a particular aspect of the business and can lead to a claim for damages whereas an indemnity is a promise to reimburse the Buyer in respect of loss suffered.
In a share purchase, the proceeds of the sale are paid directly to the company’s shareholders, who may be liable to pay tax on the proceeds but may be eligible for Business Asset Disposal Relief (formally Entrepreneurs’ Relief), which reduces capital gains tax relief to 10% on disposals of qualifying business assets, subject to a lifetime limit of £1 million.
In an asset purchase the selling company is taxed on the consideration paid by the Buyer. The company will be liable to pay Corporation Tax on the profit made from the sale and Capital Gains Tax on cash withdrawn as a dividend. The overall tax cost of an asset sale is therefore likely to be higher than for a share sale.
Also known as a tax covenant, a tax indemnity will almost always form part of a Share Purchase Agreement. The tax covenant is a promise by the Seller to pay to the Buyer the amount of any tax liability of the company incurred before the sale.
As a result, specialist tax advice should always be sought in these types of transactions.
Depending on the type of transaction structure, you must ensure you follow certain regulations in relation to the transfer of employees.
In an asset/business sale, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) is likely to apply to employees. TUPE aims to protect employees’ current terms of employment when a business is transferred to a new employer (the Buyer). A Seller may have specific obligations to inform employees about their plans prior to the completion of the sale.
By contrast, a share sale would not involve a change of employer (which remains to be the company acquired by the Buyer) and TUPE therefore does not apply.
Axiom DWFM can provide specialist employment and pensions advice to you to ensure you fulfil your obligations under employment law.
For further advice on selling your business, contact the Corporate and Commercial department at Axiom DWFM.