A private limited company sale
The good news…
The process is still the same as selling any other type of company; there are a number of key factors to consider before you start. However it does take time. If you are still very much hands on in your business you might not be in a good position to dedicate time and resources to the sale without affecting the business.
Initial negotiations are best dealt with away from the operations for obvious reasons, but this can take up precious time.
Seek advice from an specialist advisor
Whilst your solicitor and accountant will offer advice on which is the best way to sell and value your limited company, seeking advice from an independent specialist advisor, keeps any conflicts of interest at bay.
We always advise seeking advice well in advance of when you would like to sell; we certainly think years rather than months. The timing of the sale can be critical; we can help with advising when the best time to exit from your company is.
Planning the sale of a limited company
Thought has to be given to the possible potential capital gains tax liabilities and inheritance tax implications, which can vary depending how the deal is structured or enacted. So it’s worth seeking good professional advice on where you stand now and in the future.
Whilst directors and shareholders should be aligned with the sale of the business, it is important to keep the sale secret from your staff, suppliers and competitors. It is vital to ensure the company does not dip in profitability ahead of the sale.
Our company can guide you through the planning process including valuing your company, considering surplus assets, land, intellectual property, goodwill and other factors.
Marketing the sale of your business
So how do you market your limited company for sale? If you want to prevent your competition and employees from knowing, the simple answer is to get someone else to do it for you confidentially. The less people, who know you are selling the limited company, the less chance unwanted observers will find out. Using our company ensures that your sale is dealt with correctly from the start; we have been selling companies for over 45 years and are aware of the possible pitfalls that you might encounter. Marketing your business will depend on a number of factors all of which will need careful consideration before you start the process. The common mistake to make is to give out too much information about your company too early in the negotiations, as well as failing to obtain non disclosure agreements from all potential buyers. It is prudent to check out all potential buyers before proceeding with giving more detailed information about your company.
NDAs (none-disclosure agreement)
A none-disclosure agreement (NDA), also sometimes called a confidentially agreement, is a document all individual potential buyers must sign before releasing further information about your company. This point is the first stage of the vetting process, with further checks put in place before any information is released.
Our company will deal with this tricky initial contact for you, and check with you before any information is released on your business, only when you are happy to proceed will our company action any buyers enquiries. Often a potential buyer is keen to see for themselves the business, this presents a number of pitfalls and we always advise an initial meeting away from any premises so first discussions can take place away from prying eyes or ears.
Meetings between the buyer and the vendor
Remember the buyer will have many objectives during a meeting, some of these might not be to your advantage, so be wary about agreeing to anything without thinking it through thoroughly. Most initial meetings are to see how you get on and how you might end up working together. Some buyers will have contracts that will see you tied into the business for a while to ensure the smooth transfer of the business. Buyers might also like to hold meetings on site; this can be tricky as your employee base should not be aware of the sale, so clever thinking as to what the meeting is about, or choosing a time when the business is closed might be an option. Our company will always be there to offer advice and will normally attend the meetings too.
Heads of Agreements
Heads of Agreement is a non-binding document outlining the details which will subsequently be the core of the completion document. It is produced following verbal agreement on the price and deal structure. It is essential that all material elements of the intended sale are included in this document. It will save renegotiating the deal and possibly a subsequent breakdown of the deal. We advise strongly that a specialist M & A lawyer is used to assist the seller of the limited company. He/she should oversee, or better still draw up the Heads of Agreement. The right lawyer is critical to the success of the deal. Too often we have seen a breakdown of the deal due to the wrong lawyers being used. It is normal that after heads have been signed there is a lockout period. This means that the buyer will have a period of time to complete the deal whilst any other interested parties are held back. Again our company will be here to advice you on this vital document.
Matters to be addressed
There are principally four areas that will be considered by the buyer, which covers all aspects of the company. Those areas are commercial, financial, legal and tax.
The actual matter that will be addressed within these areas will depend very much on the particular circumstance of the company and its history. If the purchaser is merely buying the assets of the company and not the shares, then the purchaser is not taking on any liabilities of the operation. The purchaser often prefers to buy the net assets of the business for this reason. However, it is seldom in the interest of the seller to sell the net assets. The money on the sale ends up within the company and the company needs to be closed down or the money transferred to the shareholders in some other way. This is normally not tax efficient and can be costly. It is normally in the sellers interests to sell the shares of the company. This does mean that the new owners take on the responsibilities for any historic actions that the company may have taken. If there are issues that have arisen in the past and particularly if they could have some future repercussions, then it is advisable for the seller to bring these to the attention of a buyer as soon as possible. If the buyer subsequently finds out about these late in his negotiations then this can easily break down the trust and confidentiality in the information he has previously obtained. The process of finding out the information is called Due Diligence.
Due Diligence by the buyer will cover the four areas mentioned. Prior to making the offer and signing the Heads of Agreements the buyer will normally have done a certain amount of commercial Due Diligence. However the Due Diligence is a formal process consisting of a long list of questions which do need to be very carefully considered and answered fully. If in any doubt as whether an item is appropriate for an answer then it is recommended to put it in. The answers given may give rise to further questions. The whole emphasis is for the buyer to have a full understanding of the business and to see if any of its past activities might have repercussions in the future. In the majority of cases, the disclosure of information will remove any responsibility from the seller should any repercussions of these occur in the future, as the buyer will have had knowledge of them at the time of the purchase. There are exceptions to these in that the buyer may specifically insist on warranties or guarantees being sought and in certain specific cases he will formally not accept the disclosure. The Due Diligence will also be asking for copies of various Terms and contracts and legal agreements that the company may have. The vendor should be advised through this process by his M & A lawyer.
Indemnities and Warranties
This is where the seller of the company effectively indemnifies and guarantees to the purchaser on various matters as to the current situation of the company at the time of sale. The Indemnities and Warranties clauses will be discussed and negotiated between the buyers and the vendor. If this process is not controlled by both the buyer and vendor, the lawyers can get carried away in trying to win every single point. Many deals subsequently fail because the lawyers get too involved in the detail and fail to see the overall picture resulting in a breakdown between buyer and seller. Whilst these Warranties and Indemnities can appear to be extremely onerous on the seller it is important that the real commercial likelihood of the situation arising is considered. If it is extremely low then it is best not argued and all that time and energy is put into those that are material and have a probability of occurring.
When all the documentation has been finalised and all points have been agreed, then comes the completion ceremony. A date is normally fixed a few weeks in advance but do be prepared for a long meeting. There are normally a few matters to be finalised at the end and hopefully not an alteration in the price. These final issues can take some time to resolve and get right in the written word. The completion process will take the form of the signing of a number of documents, all of which have to take place in a particular order, although they are normally dated so they can all be signed at once and are laid out around a table. This final ceremony, more often than not takes place in the early hours of the morning. At the end of which the solicitors will normally produce a bottle or two of champagne which is well deserved for all parties.
The Following Days
Certainly for the purchaser the work really does now begin as he will need to communicate the purchase of the business to all employees, customers and suppliers giving the necessary reassurances where possible and also in understanding the business that he has just acquired. For the vendor in smaller limited companies it is more than likely a requirement of the owners to stay on in the business to assist in a smooth handover. This agreed period can last a few days or up to a few years and if it is for a few months or longer it is essential that in the early sales process that both parties are able and willing to work together. There may be interest in the business for the vendor either by way of deferred payments or in earnings related payouts. The latter are dependent on the performance of the business after completion on which the vendor has very little ability to control.