Selling a business is a complicated process, with many more components and considerations than commercial property purchases. The current state of business, the nature of the sale, and the party intending to buy your business all have an impact on the value of your business and your ability to secure its sale.
In this article, we will provide a brief overview of the legal steps involved for sellers of a business based on a straightforward transaction for the sale of a solvent business operating from rented premises. Please keep in mind that while this guide sets out these steps in chronological order, in practice there will be several matters happening at once.
What to Do Before Selling Your Business?
Until the sale of the business has been finalised, it is the seller’s responsibility to maintain the business’ operations. Failure to continue running the business as normal could result in the following:
- The sale falling through.
- The buyer wanting to renegotiate the price of the business as its performance has declined during the course of the sale.
While you are waiting for a buyer, certain arrangements must be made and documents to be gathered that could expedite the sale process or make your business more appealing to potential buyers. We recommend:
- Putting in place anything the buyer is likely to expect, such as renewing an expired lease.
- Collecting any information and copying any documents that would be supplied to a potential buyer.
- Discussing the tax effects of a sale with your accountant.
Who Are You Selling Your Business to?
When you are selling a business, practising caution with prospective buyers can be necessary. There is a chance that a competitor could show interest in your business, only to pull out of the sale and use insights they gained to further their own venture. Before you give too much information to a prospective buyer, you may want to obtain a non-disclosure agreement.
If you receive an offer for the business, whether through personal contacts or a business sales agent, you should find out as much as possible about that buyer. The most important matters you need to discover are:
- Whether the buyer has run a business before.
- How the buyer is getting the funds for buying the business, as well as the capital to continue the business after the sale.
The costs your buyer will have to raise will include the purchase price, the cost of stock, any professional fees the buyer may incur, and the cost of transferring the lease of the business premises.
Other matters you may want to consider are:
- Whether you want to exclude any assets needed in the business.
- Whether any third parties need to agree to the change in ownership, such as regulators, landlords, franchisors, suppliers, and customers who have long-term arrangements with the business.
- Who you are going to instruct as your solicitors in relation to the sale.
If speed is important, you may instruct your solicitors to prepare the sale agreement and any information a buyer will likely want in advance. These can then be sent out as soon as an offer is accepted.
Share Sale or Asset Sale?
If a limited company operates your business, there are two ways in which the business can be sold:
- Share Sale: The buyer can purchase the shares of the company operating the business from the shareholders.
- Asset sale: The buyer can purchase the assets of the business from the company operating the business.
The tax treatment and risks involved vary between the two types of sale, and this can affect the price. As a rule of thumb, sellers tend to prefer a share sale, whereas buyers prefer an asset sale, but this depends on the circumstances of each transaction.
The rest of this guide assumes that a limited company does not operate your business or that your company has agreed to an assets sale.
Due Diligence Before Selling a Business
The buyer will want to conduct financial, legal and other due diligence checks on your business. In the case of a small business, this will typically involve asking questions about every aspect of your business, as well as carrying out independent searches to prove your answers were accurate.
To validate the information given to your buyer, you will be asked to provide warranties and indemnities. If any problems arise after the sale is completed, the buyer can then claim some or all of their money back.
- Business Due Diligence
You can expect the buyer to ask to see your business accounts for the last few years, as well as details of the trading record for the business since the date of the last accounts. It is likely that the buyer will also want details of the assets included in the sale, along with confirmation that they all belong to you.
- Property Due Diligence
If you own the business premises and they are included in the sale, due diligence on the property will be similar to the conveyancing procedure. In the more likely event that you are renting commercial property, the buyer’s solicitors will want to see a copy of your commercial lease agreement to make searches and enquiries about the premises.
Normally, the seller will still be liable under the lease until it expires. This can cause difficulties if, several years after the sale is completed, the landlord comes back to ask you for the rent your buyer has failed to pay or the cost of repairs that they have not undertaken.
What Happens to Employees When Selling a Business?
The buyer will automatically become the employer of the staff working in the business on the same terms as they work for you. You will be expected to give the buyer information about the business’ employees so that they can see the extent of the liabilities they are taking on.
Some buyers may not want to keep all the current employees or may wish to negotiate their own terms of employment. If you are asked to dismiss employees or to make any changes to their employment contracts, you should take advice as to whether this is possible.
It is important that both buyers and sellers consult with employees at the earliest possible stage in the sale process, as the transition of ownership can be unsettling and cause difficulties.
Creating the Business Sale Agreement
In order to formalise the sale of your business, you will have to create a document known as the business sale agreement. The following terms should be covered:
- The price you are selling the business for and what you are giving in exchange.
- Details about the procedure and timing of completion.
- Any post-completion restrictions, such as not starting a competing business.
- Warranties and indemnities about the business to ensure the buyer receives what you have agreed to sell.
When you are satisfied with the terms of your business sale agreement, it can be exchanged with the buyer. At this stage in the process, the usual procedure is that the buyer pays a deposit to commit themselves to the purchase. However, in the unlikely event that the landlord of the premises does not accept the buyer as its tenant, the sale will not be able to proceed.
How to Transfer a Lease When Selling a Business
Before you can sell your business to a prospective buyer, you need to get permission from your landlord to transfer the lease. The landlord may ask for:
- References and other information to determine whether the buyer would make a suitable tenant.
- Rent deposit equivalent to three to six months’ rent, depending on the buyer’s financial standing.
When your landlord is satisfied with the information provided, your solicitors will obtain a licence to assign from the landlord, which the buyer will have to sign. Finally, your solicitors will prepare the form of assignment, otherwise known as the transfer of lease. While some sellers ask the buyer to pay the landlord’s legal costs for dealing with the licence to assign, the seller normally covers these costs.
What Happens at the Completion Stage of Selling a Business?
When the previous steps have been carried out, a date will be set for completion. Completion can either occur as a meeting between all parties and their solicitors or, as is more common these days, by the solicitors on behalf of their respective clients over the telephone.
As you will have paid business rates, rent and any service charges under the lease in advance, these payments will be apportioned, and the part that relates to the period after completion will be added to the price. Some assets may need additional documents to transfer ownership. Contracts with third parties, such as any equipment leases for vehicles and supply agreements with customers or suppliers, may need a ‘novation’ between the buyer, the seller and the third party.
When everything is ready, the buyer will pay the outstanding balance on the property. Once money has changed hands, the buyer will then become the owner of the business, employer of the employees, and the tenant of the premises.
How Long Does It Take to Sell a Business?
In most cases. completion will be achieved about six weeks after the instruction of solicitors by the buyer and the seller. This timeframe is dependent on there being no undue complications or delays.
In all cases, the seller’s solicitors are only able to work at the pace of the buyer and the buyer’s solicitors. However, the involvement of third parties, such as landlords and banks, tends to lead to the greatest delays.
Do You Need Help Selling a Business?
While we hope this article has provided some insight into the sale of a business, please be aware that this overview is not intended to replace legal advice. Newtons cannot accept any responsibility for anyone acting or failing to act as a result of anything contained in or omitted from this article. We would advise prospective sellers to seek professional advice before entering into any kind of agreement with potential buyers or their commercial landlords.
If you are planning on selling a business and are searching for a business solicitor to help you through the process, contact us today and a member of our team would be happy to assist you.