Guide 8 min read
1. Undergoing due diligence
Once you have found a buyer for your business and initial sale terms are agreed in the ‘Heads of Agreement’, your buyer will review commercial aspects of your business - such as contracts, staff and key customers - before signing the contract.
They will also audit the business finances to ensure the claims you have made about the business are accurate. This process is known as due diligence.
Your buyer and their advisers may need to spend some time at your business's premises reviewing original documentation, but a lot of work can be carried out off-site. The process should not be used to renegotiate the deal.
The due diligence process is likely to cover:
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the business's past performance, and forecast financial performance
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accounts
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valuation of property and other assets
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legal and tax compliance
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any outstanding legal action against the business
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major customer contracts
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intellectual property protection.
2. Warranties and indemnities
It's likely that your buyer will ask you to provide them with reassurance about what they've bought and provide them with protection against future liabilities in the shape of warranties and indemnities. Giving these commitments may help you achieve a higher price, but you must take expert advice to ensure you properly understand your level of risk.
Warranties
Warranties provide legal confirmation that certain facts relating to the sale of the business are accurate. For example, you might have to guarantee that financial information you have shown to the buyer is accurate and that the assets you claim to own exist. The buyer may be able to claim against you if the information is later found to be incorrect.
Indemnities
Indemnities are promises to reimburse the buyer for any losses resulting from specified future events. For example, you may have to indemnify the buyer against any penalties resulting from tax or VAT inspections into accounts drawn up before they took over the business.
3. Signing the contract
As the due diligence process nears its conclusion, the sale agreement will be finalised. This will contain the exact details of the sale, much of which should have been outlined in the ‘Heads of Agreement’.
There will have been compromise on both sides to obtain a final document that is acceptable. A dialogue should be maintained with all parties to ensure the final agreement is acceptable and contains no hidden surprises about your future liabilities.
You must take expert advice from your advisers when creating and signing the contract.
Before you sign
Your advisers should ensure you fully understand the terms of the agreement you are signing and the full extent of any indemnities and warranties you have agreed to.
Before you sign, you should:
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review your aims in selling the business and assess how well this contract meets them
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make sure all the agreements made during the negotiation are included in the contract
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make sure there are no vaguely worded provisions, exclusions or limitations in the contract which could give rise to problems later
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check the financial and tax details again with your financial adviser
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check your obligations and the wording of the contract and other agreements again with your solicitor
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establish a schedule of tasks for completing the sale and making the handover.
The final document
The final documentation typically includes:
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the sale agreement
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the tax deed (in share purchases this is the seller's indemnity against unforeseen tax liability)
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any other indemnity agreements, where the seller agrees to reimburse the buyer in full for undisclosed liabilities incurred by the company before the sale
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minutes of the board meeting agreeing the transfer of ownership and resignation of directors
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transfer documents for licences, leases, client contracts, shares, etc.
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service agreements (for the seller and other directors remaining in an advisory role and for employees remaining with the business)
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finance details for the sale (including guarantees, loan or share agreements)
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agreements for any deferred payments by the buyer
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warranties, for example guaranteeing the accuracy of the seller's statements on all key information
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the seller protection schedule for the buyer's claims against warranties
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the seller's disclosure letter and documentary evidence regarding warranties
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non-compete agreements or covenants (for the seller not to set up a competing business in the same area within a given time period).
After signing, the buyer's and seller's solicitors ensure that each side keeps the original documents they need.
4. Completing the sale
You have responsibilities when selling your business for example around your VAT registration, tax returns, paying Capital Gains Tax, and informing HMRC.
Your approach to fulfilling these responsibilities will depend on whether you are a:
You must make sure your employees’ rights are not infringed when transferring ownership.
Selling a business will inevitably affect your employees. Some sellers include considerations relating to employees as part of the negotiations. For example, it may be possible to achieve an agreement with the buyer that there will be no redundancies for a set period.
Informing and consulting employees
A key decision is when to inform employees that you are selling the business. This will depend on the culture of your business, the reason for sale, and any potential for disruption of negotiations. In many cases, sellers do not inform employees until the sale is agreed, unless they need to inform key staff for practical reasons or because they are shareholders. Your adviser will ensure that you time the consultation and informing of employees appropriately to comply with legislation.
When a business is sold or transferred, employees will transfer to the new employer and you need to check your responsibilities around informing and consulting your employees.
Employees are protected from unfair dismissal under the Transfer of Undertakings (Protection of Employment) regulations. (otherwise known as TUPE).
Both old and new employers must inform and consult with staff representatives to:
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explain why the transfer is happening
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share any changes they're proposing e.g. to working practices.
ACAS provides checklists for the old and new employers.