22 FAQs about selling a business
- Who should I sell my business to?
- What advisers will I need?
- How can I make sure my advisers work well together?
- How much will my business be worth?
- What alternatives are there to an immediate cash payment and should I be prepared to accept them?
- How much will it cost to sell my business?
- How long will it take to sell my business?
- How do I market my business?
- How can I protect myself while the business is being marketed?
- Am I free to carry on running the business as I choose until the sale is completed?
- What do I need to find out about buyers?
- Should I give my preferred buyer an exclusive negotiating period?
- What are heads of terms?
- Can a buyer pull out after signing heads of terms?
- What role do I have in the buyer's due diligence?
- Do I have to tell the buyer about any business problems I am aware of?
- Will I have any responsibilities or liabilities after the sale?
- What warranties and indemnities will I need to give?
- How can I limit my liability under the warranties I give?
- Will I have to sign any covenants or other agreements?
- What happens on completion?
- How can I minimise my tax liability on the money I receive from the sale?
1. Who should I sell my business to?
Your options will depend on who is interested in your business, and how much it is worth to them. Selling to a well-funded trade purchaser can be the best choice, but it depends on the circumstances. Your business might be particularly valuable to a company with weaknesses in the areas you specialise in.
You will want to ensure that any potential purchaser has the finance in place to make the purchase. For example, you might ask a potential purchaser to show indications of support from investors or banks that will finance the purchase.
Ideally, you will only negotiate with potential purchasers who have a serious interest and are willing to negotiate constructively. You will want to judge whether a trade purchaser is simply using the opportunity to find out about your business. Similarly, a purchaser might be interested only in part of your business, or not prepared to take responsibility for all the existing liabilities. If this is unacceptable, you will need to find another purchaser.
2. What advisers will I need?
A corporate finance adviser can help you groom the business, identify potential purchasers and market the business to them. It is usually worth using a specialist adviser or working with your accountants if they have expertise in this area.
You will need a corporate lawyer to draft and negotiate the sales agreement. Your lawyer may also need to be involved in preparatory work such as formalising contractual relationships with customers, suppliers and key employees in preparation for the sale. It is sensible to discuss your plans with your lawyer before taking any other steps.
Your advisers should include individuals with expertise in minimising tax liabilities; if not, you will need a separate tax accountant or lawyer.
3. How can I make sure my advisers work well together?
Give each adviser written instructions that clearly state their responsibilities. Avoid overlapping responsibilities as far as possible.
Where two advisers will work closely together - for example, your accountant with a corporate finance adviser - arrange an introductory meeting to discuss what needs to be done and how the relationship will work. In any case, you will need to liaise regularly with all your advisers and take responsibility for controlling the sale process.
4. How much will my business be worth?
There are many different ways of valuing a business, depending on the circumstances: for example, based on earnings, cash flow, turnover or asset value. A growing business in a sector with good prospects will be more highly valued than a mature business in a declining industry. Your advisers will be able to provide a broad indication of what you can expect.
Ultimately, however, your business will be worth what a purchaser is prepared to pay for it, subject to negotiation. You and your advisers should have an idea of how much you hope to get, though you would not normally reveal this to potential purchasers. Instead, you might give an indicative level. You might also prepare arguments to support a high valuation.
You are more likely to be able to negotiate a higher sale price if you can interest more than one potential purchaser.
5. What alternatives are there to an immediate cash payment and should I be prepared to accept them?
Purchasers may want to defer part of the payment. This puts you at risk of the purchaser becoming insolvent during the interim period. However, accepting deferred payment may increase the price purchasers are willing to offer, and can be a useful part of your own tax planning. You should ensure that you negotiate suitable security for any deferred amounts.
Along with deferred payment, buyers sometimes wish to negotiate an earn-out, where part of the price paid is based on the future performance of the business. Again, this exposes you to risk - if the business underperforms - but may increase the price the purchaser is prepared to offer. It is common to negotiate your continued involvement in running the business as part of any earn-out arrangement. Such provisions need careful drafting to ensure that the business has the best possible chance of meeting its targets to ensure the anticipated price is achieved. Careful consideration needs to be given to the tax consequences of such an arrangement.
Purchasers may wish to use shares in their company to pay for the purchase. In effect, they are asking you to swap your shares in your company for shares in their company. If so, you will need to establish how much those shares are worth to you. Accepting a minority shareholding in an unquoted company can be risky. You will need to check their company's articles of association to see what rights the shares give you, and for any restrictions on sale of the shares in future, and may want to negotiate a suitable shareholders' agreement. Otherwise you could find that you have no control over how they run their business, are unable to sell shares when you wish to, and cannot obtain a good price for them.
6. How much will it cost to sell my business?
The main immediate cost will be your advisers' fees. Advisers generally charge an hourly rate. Some advisers (such as a corporate finance adviser) may work on a monthly retainer together with a success fee charged as a percentage of the sale price.
Ensure that you have written agreements with all your advisers setting out the basis of their fees, and ask for estimates of costs. As a very rough rule of thumb, you might expect fees to total 10% of the sale price.
7. How long will it take to sell my business?
The first step to selling your business is to start grooming it for sale. The more time you have, the easier it will be to get the business in the best possible shape for sale.
Once you begin the actual sale process, you will need to identify and attract potential buyers. This can take anything from a few weeks to several months.
The other main phase is negotiating and completing the sale. This is likely to take a minimum of a month, but can take much longer. Negotiations and due diligence take up most of this time. The purchaser will want to verify financial and commercial information by checking records and asking question to make sure that the business owns everything you say it does and there are no hidden liabilities or disputes. Your advisers will be able to tell you what information they need at the outset, particularly from third parties, which can speed up the process.
8. How do I market my business?
You usually work with a corporate finance adviser to market your business. As well as having relevant expertise, it is easier for the adviser to protect the identity of your business in the early stages of the marketing process. You generally cannot advertise shares of a private company to 'the public'.
Start by preparing a sales memorandum - a marketing document you can send to interested parties. It should make the business sound attractive and provide key information for buyers. It should not, however, include detailed confidential information.
Identify possible purchasers: for example, other businesses in the same industry, your management team, and venture capital investors. Prepare a list of potential purchasers and make a short list of the top prospects.
As part of this process, you or your adviser may approach agents acting for potential purchasers. If so, you will need to negotiate which purchasers they can approach and what information they may disclose. You will also need to clarify whether any fees will be payable by you if one of their clients purchases your business.
Approach the top prospects on an anonymous basis to see whether they have a potential interest. One way is to send them a one or two page summary of the sales memorandum. This summary should not reveal your identity, but should provide broad information such as the nature of the business and its size. Ensure that any documents you send include appropriate legal disclaimers - ask your corporate finance adviser or lawyer for advice.
Ask interested buyers to sign a short confidentiality agreement. Then send the full sales memorandum and arrange meetings. Ask buyers for indications of interest and opening offers. If none of the top prospects appear credible purchasers, approach further names on your list.
9. How can I protect myself while the business is being marketed?
Allowing the fact that your business is for sale to become known can be damaging. Business partners and employees can find the information unsettling and competitors may try to take advantage. Competitors may also want to make use of confidential information on your business that you make available during the process.
Requiring potential purchasers to sign a confidentiality agreement can reduce these problems. Even so, information often leaks. At some point during the process, it may be a good idea to talk to key customers, suppliers and employees about what is going on.
The other risk is that you become distracted by the sale process. It is essential to continue to manage the business until it is sold, both to maintain its value to potential purchasers and in case any sale falls through. Delegating responsibility for the sale to an individual manager leaves the rest of the management team as free as possible to focus on running the business.
10. Am I free to carry on running the business as I choose until the sale is completed?
Unless you have signed any agreement to the contrary, yes.
However, you should think about the sale implications of any decisions you make. For example, entering into long-term commitments could make your business less attractive to a purchaser who wishes to pursue a different strategy. On the other hand, your business might be more attractive if you have arranged suitable incentive schemes to retain key employees.
11. What do I need to find out about buyers?
Your primary concern may be to ensure that they have the financing in place to make the purchase. If any part of the purchase price is likely to be deferred (see 5) you will need to evaluate the creditworthiness of the purchaser. Similarly, if any part of the payment will be in alternatives to cash - such as shares in their company - you will need to establish their value to you.
Make sure that you know what their expectations of you are: for example, whether you will be required to stay involved with the business, and what warranties or indemnities they require.
You may want to find out how they plan to run the business. For example, you may be concerned whether any employees will be made redundant. The price you receive may also be affected if part of the purchase price is deferred and is based on future profits or sales.
Try also to find out about the buyer's reputation as a purchaser. If a potential purchaser has a reputation as a difficult and demanding negotiator, you may prefer to look for an alternative.
12. Should I give my preferred buyer an exclusive negotiating period?
This is often a good idea. It allows you to focus on one buyer, and prompts that buyer to proceed quickly during the period of exclusivity.
Before giving any buyer exclusivity, make sure you have covered all the key points to ensure that they really are your preferred buyer. You would normally agree heads of terms before giving an exclusive negotiating period, and you may want a financial commitment from the buyer before doing so.
13. What are heads of terms?
Heads of terms are a signed agreement setting out the main points of the deal. Once you feel that the major negotiating points have been agreed, it can be a good idea to suggest that your lawyer prepares heads of terms. Completion of the deal is then dependent on due diligence - verifying key financial and legal information, checking legal ownership of business assets and so on - and negotiation of the sale documentation.
Heads of terms can include legally binding terms. For example, you may agree to an exclusivity period, or you might require the buyer to cover your legal costs if they decide not to go through with the purchase.
14. Can a buyer pull out after signing heads of terms?
This depends on what the document says. For example, the heads of terms might simply indicate intentions and be entirely subject to negotiation. The heads of terms might require buyer and seller to use their best efforts to reach agreement. Or the heads of terms might include binding commitments on either buyer, seller or both.
The buyer will usually be able to pull out after signing heads of terms. The heads of terms may include some form of commitment - such as requiring the buyer to pay your legal fees in these circumstances. A buyer will almost always be able to renegotiate or pull out if unexpected information comes to light during due diligence.
Even without a legal commitment, in practice the buyer becomes increasingly committed to the transaction the more time and money they invest in negotiating. Both you and the buyer will also find it more difficult to negotiate a change to an issue that has already been covered in the heads of terms, so it is important to take advice from your lawyer in the early stages.
15. What role do I have in the buyer's due diligence?
You want to ensure that the buyer’s due diligence (their checking and verification of key financial and legal information by going through your records and asking you questions) doesn’t produce any surprises that threaten the deal.
Before due diligence begins, you should ensure that the buyer is aware of key legal and financial issues affecting the business. One option is to carry out your own due diligence process in advance. This allows you to identify, and where appropriate deal with, issues that will otherwise turn up during the purchaser’s due diligence.
You then want to make the due diligence process as smooth as possible. Your role includes making documents available, authorising the disclosure of confidential information to the purchaser, and keeping an accurate record of all documents and information that has been provided.
Finally, the due diligence process usually leads the purchaser to ask for a variety of warranties and indemnities, which you will need to negotiate (see 18 and 19). At the same time, your lawyer will ensure that you produce a disclosure letter, providing evidence of all the information you have made available to the purchaser.
16. Do I have to tell the buyer about any business problems I am aware of?
As part of the process, the buyer is almost certain to require you to make various warranties. These may cover financial, legal or commercial matters. For example, you may be required to warrant that the company is not involved in any litigation and hasn’t been threatened with litigation.
Giving false warranties can have serious consequences. The buyer may be able to sue you for any losses suffered.
You are not generally required to volunteer information or opinions without being asked for them. For example, you would not normally tell the purchaser if you believe that competition is going to increase. However, deliberately making untrue statements to induce the purchaser to buy the business may constitute fraudulent misrepresentation. The purchaser may be entitled to claim compensation for any loss suffered.
Deliberately making untrue statements or dishonestly concealing material facts to induce a purchaser to buy shares of a company can have criminal consequences.
17. Will I have any responsibilities or liabilities after the sale?
If you continue to be involved with the business - as an employee or as a director - you will retain the responsibilities and liabilities associated with your role.
If you have given personal undertakings you will need to ensure that these no longer apply. For example, if you have personally guaranteed the debts of the business, you should negotiate an end to the guarantee as part of the sale transaction. Otherwise you will remain potentially liable.
You will also have potential liabilities under the warranties and indemnities that you have given.
18. What warranties and indemnities will I need to give?
Typically, the buyer will ask you to give an extensive list of warranties covering a range of financial, legal and commercial information. You warrant that the information you have provided is true, and may be held liable if this is not the case.
Broadly speaking, you will be asked to give warranties where the buyer cannot know the true position otherwise. For example, it is not possible for a buyer to know whether your business is involved in litigation or has been threatened with litigation. You would normally be asked to warrant that this is so (and to disclose details of any lawsuits or threatened legal action). Similarly, you will warrant that the financial information you have provided is true, and so on. The full list of warranties required can be long.
Indemnities tend to relate to more specific items. For example, if the business is currently being sued, you might indemnify the purchaser against any damages that might be awarded against the business as a result of that lawsuit. Typically you will also give an indemnity for any tax liability relating to the period prior to the sale.
Warranties and indemnities are a matter for negotiation. The more warranties and indemnities you give, the greater the degree of confidence the buyer can have that there will be no unpleasant surprises. This can help to increase the price the buyer is willing to pay. At the same time, you should take steps to minimise your potential liability.
19. How can I limit my liability under the warranties I give?
You can reduce the scope of the warranties by disclosing information. For example, you might be asked to warrant that equipment is in good condition. Instead, you might disclose that in fact one item is in poor condition, and give a warranty that the other equipment is in good condition. Of course, the purchaser may wish to renegotiate the purchase price as a result of your disclosure. It is important to keep a record of all information that is disclosed.
You can also try to negotiate limitations on your liability under the warranties. For example, you could negotiate a maximum liability (often equal to the price the purchaser pays for the business). You may also negotiate a minimum level of claims - so that the purchaser cannot claim for trivial amounts - or an excess where you are only responsible for the amount by which claims exceed a set level.
It is good practice to negotiate time limits on any warranties and indemnities. These would specify that you are only liable until a set date, and that any claims against you must be made within a limited time.
A large part of the legal advisor's role is to negotiate giving as few warranties as possible, and as many limitations as possible.
Finally, it may be possible to arrange specialist insurance to cover some or all of your potential liabilities.
20. Will I have to sign any covenants or other agreements?
It is common for the purchaser to require a restrictive covenant that prevents you from competing with the business you have sold for a period of months or years.
If you control assets or other businesses on which the business relies, you may also be asked for other agreements. For example:
- leasing the business premises which you personally own
- licensing intellectual property you own to the business
- entering into a supply agreement for components which another business you own produces
- agreeing to distribute the sold business's products through your distribution network
As with most other aspects of a sale, everything is negotiable. By entering into the agreements, you will be increasing the value of the business to the purchaser - and will aim to have that reflected in the price they pay.
21. What happens on completion?
At completion, control of the business and assets will pass to the purchaser. Unless you are remaining as a director or employee, your resignation will normally take effect at the same time.
You will be entitled to receive payment in accordance with the terms of the sale agreement. There will usually be some further accounting work to be done - for example, calculating the value of stock - as the price paid often depends on this.
22. How can I minimise my tax liability on the money I receive from the sale?
The tax treatment depends on whether the transaction has been structured as a share transfer, the sale of assets or sale of a business as a going concern. Different methods of extracting money - for example, through paying a dividend to yourself, or making contributions to your pension scheme prior to completion - will also have different tax implications.
There are also ways of deferring tax liabilities. For example, part of the purchase payments can be deferred, or you can reinvest the proceeds in another (qualifying) business and claim Capital Gains Tax reinvestment relief.
At the same time, you will need to consider the risks of any tax mitigation strategy. The way the transaction is structured and paid for will also have implications for the purchaser, and so will form part of your negotiations.
These are all issues you should discuss with your advisers.