Selling a Business

How is a business sold?

When buying a business of any nature and size, the fundamental sale process is the same:

1. The buyer and seller will agree what is being sold and how much it is being bought for;
2. A seller might ask a buyer to enter into a confidentiality agreement at this early stage. ;
3. The buyer will typically go through a “due diligence” process to find out more about the business. This is less substantial in a management buy-out situation but will be a significant part of any arms-length business sale;
4. The buyer’s solicitors will draft a business sale agreement which will set out the terms on which the seller has agreed to sell the business, and will also set out a number of promises made by the seller about the business;
5. In addition to the main sale agreement, there will be some other documents to be prepared and negotiated linked to the sale (called “ancillary documents”);
6. Once the documents are in agreed form and any conditions to completion are met, the parties will proceed to completion and the buyer will pay to the seller whatever part of the purchase price is due on completion.

How is the sale of a business structured?

There are 2 main approaches to selling a typical business:

1. Selling the assets of a business (called an “asset sale”); or
2. Selling the shares of a business (called a “share sale”).

What are the differences between an asset sale and a share sale?

With an asset sale, a seller will only sell specific assets and liabilities which they agree with the buyer.  This enables the seller to select only those aspects of the business that they want to sell.  It also enables a buyer to exclude any liabilities that they don’t want to take over, and leave those with the seller.

After completion of the asset sale:

• The Seller still owns whichever assets and liabilities it did not sell
• The Seller company is still owned by its original shareholders
• The Buyer will “step into the shoes” of the seller in relation to any contracts etc. it may have bought

With a share sale, the seller will sell the target company “warts and all”.  The buyer will purchase the entire shareholding of the company and therefore acquires all of its assets and all of its liabilities.

After completion of the share sale:

• The Sellers no longer own any shares in the target company
• The Buyer now owns the target company
• The Buyer has acquired all of the assets and liabilities that were in the target company at completion
• Payment for the shares goes to the shareholders personally

How to choose between an asset sale and a share sale:

The circumstances of the business sale, and advice from professional advisers particularly surrounding tax issues, will usually dictate whether the sale of a business should be structured as an asset sale or a share sale.  We would always advise prospective buyers and sellers of a business to take tax advice early on in the sale negotiations.

As a general starting point, here are some typical situations which would lean towards an asset sale and share sale:

Generally an asset sale is viewed as more buyer-friendly, and a share sale is viewed as more seller-friendly.  The final decision on structure is likely to be determined by the negotiation power of both parties, and the tax advice received.

What happens to the employees of the business being sold?

With a share purchase, the employees remain within the same target company.

With an asset purchase, there are special rules (known as “TUPE”) which determine whether or not the employees will automatically transfer to the buyer, or whether they will remain with the selling company.

What are the key negotiation points when selling a business?

Every business and transaction is unique, so there is no one-size-fits-all approach when it comes to negotiating the terms of a business purchase.  However, there are some key points which will apply to every business sale, and some additional points which prospective sellers should consider including:

• Purchase price, including how it will be paid (e.g. Will it all be paid up front, or will some be in instalments? Is any of the purchase price conditional on certain targets being met? Will any part of the purchase price be non-cash?)
• Is there an ideal timeline for completion?
• For an asset sale, which assets and liabilities are being purchased?
• For a share sale, will the sellers (or any of them) being staying on after completion as employees/consultants?
• Are there any other issues, such as property issues, which must be dealt with?

Some negotiation points might be revealed as a result of the due diligence process.

Agreeing heads of terms for the sale of a business

Heads of terms are a very useful tool when selling a business.  They enable a buyer and a seller to set down what terms they have agreed for the sale and purchase of the business.  This means that any key issues can be agreed and any potential problems are managed at an early stage of the sale process, before incurring any significant legal costs.  See our guide on heads of terms for more information.

Agreeing the other key agreements and documents

The main asset sale agreement or share sale agreement will contain various provisions relating to the sale of the business.  These agreements are extremely important in the purchase of a business, and must be negotiated carefully.

If you need any advice on selling a business, please contact a member of our corporate and commercial law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.