Guide 7 min read
1. Preparing a sales memorandum
Once you have prepared your business for sale and had it valued LINK to article 241 you are ready to write a ‘sales memorandum’ (also known as an ‘information memorandum’). The sales memorandum is the initial marketing document you use to spark interest in your business. It contains the core information about your business, presented to attract potential buyers and explain what the sale includes. Your adviser or business broker can help you with this.
The sales memorandum should truthfully and clearly present the business as positively as possible and include a summary of key details such as:
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your history, sector and unique selling points
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reason for the sale
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your customer base and competitors
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key financial figures such as profit, cashflow, value of assets and total debts, as well as forecasts
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your business premises
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number of employees, with job titles, and location of premises
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opportunities for growth or improved profitability
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expectations of selling price, terms and conditions, and preferred sale structure.
This document shouldn't include confidential information such as names of customers or commercially sensitive details such as pricing structure.
2. Identifying likely buyers
Your choice of buyer may be based on selling to the highest bidder or the one who best secures the business's future, which might include selling your business LINK to ‘Preparing to sell your business’ article 241 to management or employees.
If you are looking to sell your business externally you can draw up a list of prospective buyers. Trade magazines, business directories and the financial press may provide you with ideas of peers, competitors, suppliers or customers who may be interested in buying your business. This could be because:
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you're the market leader in a segment which might appeal to a competitor or a business that could cross-sell other products
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you have a product that complements their offering
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they could use your distribution channels
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they could benefit from economies of scale in areas such as purchasing, production and sales
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your people and skills may complement theirs
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they want to expand into your geographic market.
Your corporate finance adviser or business broker should be able to help you identify possible buyers, both in the UK and abroad. They will have access to databases of prospective purchasers as well as a network of contacts.
For certain types of business it can be worth advertising your business for sale. For example, to find buyers for a shop, hotel, restaurant, coffee shop or pub, you can advertise in publications such as Daltons Business or listings such as Businessesforsale.
3. Approaching potential buyers
Once you have identified potential buyers, your adviser may contact them to assess their interest.
Maintain confidentiality
Your adviser may avoid revealing your identity in the early stages, if knowing that the business is for sale could unsettle your existing customers and employees. Competitors may also try to use the sale to find out your trade secrets. Therefore, many sellers prefer to approach potential buyers through their adviser to help maintain confidentiality.
Once prospective buyers have been identified, they are usually asked to sign a non-disclosure agreement where they agree not to use or pass on any confidential information about your business.
Assess intent
The adviser also assesses how serious a potential buyer is and whether they are credit-worthy and likely to be capable of funding a purchase.
If possible, don't focus all your efforts on a single prospect. If the buyer knows they are the sole interested party, they can call all the shots.
Once buyers are seriously interested, they usually want to meet to ask more questions and maybe see round your premises.
Invite indicative offers
Your adviser may ask them to make an opening or indicative offer before they meet you.
This could cover various elements including:
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what the buyer is offering to purchase, e.g. the business or its assets
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the price range they're prepared to pay and any payment terms
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how they plan to structure the deal
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proposed timetable for completion of the deal and any period of exclusivity
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the main information required by the buyer before a firm offer will be made, e.g. whether leases, licences and client contracts are transferable, liabilities for employees, etc.
Short-list potential buyers
Indicative offers help you assess how serious buyers are and help you short-list potential buyers by whether it is worth investing time to build a relationship and become involved in more detailed negotiations with potential buyers.
Price is just one factor to consider when weighing up offers for a business. For example, the potential buyer's proposed timetable for completing the deal is important - as a drawn-out sale could be damaging to your business. Once you identify your preferred buyer, it's important you understand any offer before accepting it, particularly any liabilities you will be taking on.
4. Progressing an offer
When both buyer and seller are satisfied with their initial checks, and an initial offer has been made and accepted, the next step is to negotiate the firm purchase offer, or ‘Heads of Agreement’ (sometimes known as a 'letter of intent' or 'Heads of Terms').
Heads of Agreement
This is a document setting out the key points of the deal. For example, this could include:
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what the buyer has agreed to buy (e.g. shares or assets)
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the payment structure (i.e. how and when they will pay)
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who will pay the costs
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a list of assets, details of contracts, and responsibilities to employees.
It is not usually legally binding although some elements may be. For example it might set out:
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confidentiality and an exclusivity period during which you are not allowed to negotiate with anyone else
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responsibility for the payment of legal fees if one party pulls out
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the seller’s disclosure letter limiting their liabilities under the warranties.
You should also inform other interested parties when you have done this.
If the seller does not meet the preconditions, the sale will probably not go ahead. If warranties are breached, the buyer can sue for damages. It is a criminal offence for the seller to give false or misleading information about shares.
Due diligence
Once the Heads of Agreement is signed, the buyer's advisers carry out thorough searches into the business records, called ‘due diligence’ LINK to Article 250 Complete the sale of your business.
There are three types of due diligence:
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legal - for example, checking that the business has legal title to the assets which it is selling/transferring
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financial - checking that everything is in order financially
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commercial - assessing the business's position in the market place.
During this period, negotiations continue with the seller on drafting the final sale agreement, or sale purchase contract.
5. Payment structure and tax
A one-off cash payment may be the most appealing option, but it might not be the most tax efficient and it's possible you'll have to accept some form of deferred payment.
You may be offered a combination of cash and shares in the purchaser's business. Your buyer might also prevent you from selling your shares for some time.
If you are offered deferred payments, establish whether or not they are guaranteed. Buyers may want to lessen their risk by making future payments based on the business's future performance - known as an earn-out.
While earn-outs may increase the final amount you receive, there are inherent risks and you may not receive as much as you expect. Continued management involvement can enable you to influence the meeting of the performance targets. But you may decide that you no longer wish to be involved in the business once you have sold it.
Remember that you may have to pay Capital Gains Tax on the sale of your business. Speak to your accountant to discuss how you can manage your liabilities for Capital Gains Tax and make the most of the reliefs available.
Once you have agreed the final deal structure, you will move into due diligence and complete the sale of your business. LINK to ‘Complete the sale of your business’ article 250