How to sell your business

Selling your business is one of the most significant decisions you’ll make in your life. Whether you founded the business or acquired it during its lifecycle, careful planning is essential to ensure a smooth sale process.

This is the first article in a four-part series outlining the process of selling your business with a focus on providing an overview of a typical sales process.

Planning for a sale

At the outset of a potential sale, it is vital for both the buyer and seller to understand the value of the business. To this end, a business owner should engage with accountants, tax advisers and lawyers as early as possible to get a steer on the potential value of the business.

Recognising the buyer’s motivation for acquiring the business is important too. Often it can be obvious, perhaps they are a key customer, a competitor, or they are looking to break into a new market.

Unlocking value requires careful planning. A well-prepared seller can make the business more attractive by ensuring important assets are in the right place, intellectual property is protected, employees have suitably drafted employment contracts and the workforce is motivated and incentivised.

Preliminary documents

Once a buyer has been identified, the parties often reach agreement in principle on the key deal terms – known as Heads of Terms.

The Heads of Terms set out the principal terms such as (i) deal structure; (ii) price; and (iii) the conditions a buyer requires satisfied before proceeding with the deal.

As is standard in such a transaction, the buyer will require access to information relating to the business, much being confidential and sensitive. Prior to providing this, it is standard practice for parties to enter into a Confidentiality Agreement (also known as an NDA) which controls the buyer’s use of the information during their investigation.

Buyers may also require the seller to sign an Exclusivity Agreement to prevent them from negotiating with other interested parties whilst they are negotiating with the buyer.

Due diligence and consents

Once the preliminary documents have been agreed, the buyer begins a thorough investigation of the business. The buyer seeks to gain a complete picture of the business, the results of which can have an impact on the price the buyer is willing to pay. Therefore, it is vital for a seller to be able to present the business in the best light possible to ensure the buyer is comfortable paying the price they have agreed to pay in principle.

The importance of a well-run due diligence process is the focus of our second article in this series.

Documenting the transaction

The terms of the transaction will be set out in a Purchase Agreement, which forms the legally binding contract between the parties and is often heavily negotiated between the parties’ advisers. After all, it is crucial for the parties to have a robust contract to rely on if a dispute arises in the future.

The Purchase Agreement will include key terms such as (i) how and when the price is paid; (ii) any conditions that need to be satisfied before the transaction completes; (iii) assurances from the seller as to the state of the business; and (iv) restrictions on the seller from competing with the business in the future. The third article in this series explores some of the importance aspects of the Purchase Agreement from a seller’s perspective.

Completion

Once all the documents are agreed between the parties, the transaction will progress to “completion”. Typically, this involves the signing of documents, payment of the purchase price and delivery of any items that the buyer requires to run the business.

Conclusion

Selling a business requires strategic planning, early engagement with advisers, and clear documentation to ensure the business owner gets the best deal possible. A well-prepared business owner who presents their business in a good light and negotiates sensible sale terms is likely to achieve more value for their hard work.

This first article in our “how to sell your business” series has covered an overview of the sales process; the next instalment will focus the due diligence exercise and explore practical ways to manage the process effectively.