Selling your business? We can help

If you have decided that you have had enough, or you want to slim your business down by selling a part of it, you will need to understand the legal procedures needed to achieve this. You may have been approached by a potential buyer and this has prompted you to consider moving on. You may know that you will have to have a legal contract in place that it will have to be negotiated with a buyer, but you may well be unaware of the number of things that need to be dealt with before you reach that stage. This note aims to explain the process in order to ensure that there will be no surprises.

The due diligence procedure

You may have been talking informally to a prospective buyer for a while but, as soon as an agreement has been reached in principle, that buyer will want to start investigating your company on a more formal basis.

This process is known as due diligence, and its purpose is to ensure that the buyer can obtain as much information as possible about your company, its clients and its day to day business as possible. The buyer needs this information in order to decide whether to proceed and the price he needs to pay you. In the course of their investigations, buyers may discover things that might mean they ask for specific indemnities from you or, at worst, they may decide not to proceed.

What’s next?

A quick and painless process of selling you company or business will only be achievable if you have thought it through and prepared thoroughly. You should consider putting documentation in place (but beware confidentiality problems, either by alerting your staff of a potential sale or giving the buyer more than he may require), ready to hand over to the buyer when requested.

When the buyer is ready to start the due diligence process, his solicitors will send your solicitors a detailed questionnaire, covering all aspects of your business. You should ensure, before any information is sent to the buyer in response, that a confidentiality agreement is in place, together with a lock-in agreement for a specified period of time, if appropriate.

Your solicitors will then liaise with the buyer’s solicitors to coordinate the replies to the questionnaire and the documents in support. This procedure can cause delays and sometimes frustration if you have not prepared properly. You need to ensure that you are well organised at this stage so that the next stage, the disclosure letter, will not add to the length of time needed to complete the sale and possibly cause the buyer to look elsewhere.

In the meantime, your solicitors will be reviewing and negotiating the sale agreement drafted by the buyer’s solicitors. The agreement is likely to contain a schedule of warranties that you will be required to give, promising that your company or business is in the condition you contractually state that it is, and setting out any liabilities it may have.

The disclosure letter

The warranties need to be accurate; if they are not, the buyer may have a claim against you after the sale has been completed. For this reason, you will have the opportunity to put together a disclosure letter that qualifies the warranties given to the buyer that will give you some protection against any claim. Even if your business is not performing at its best and there are things you might not want the buyer to know about, we always advise sellers to disclose as much as possible to the buyer in the disclosure letter. Things swept under the carpet almost invariably come to light sooner rather than later.

All disclosures, provided they are made fairly and accepted by the buyer, will protect you from a claim for breach of warranty after the sale. The disclosure letter will travel backwards and forwards between the solicitors, as will the various drafts of the sale and purchase agreement during the negotiation process. Depending on the number of warranties the buyer is seeking, do not be surprised at the length of time it may take to arrive at agreed documents.

Completion

Once the agreement and the disclosure letter are finalised there will be some additional short documents to be prepared by the solicitors for both sides and, once these are ready for signature, the completion process can take place and the sale and purchase finished.

This article provides a summary of the issues involved and is not a comprehensive guide. It is not intended to be relied or acted upon without taking specific legal advice.