This is Part 2 of our guide to Selling Your Business. In Part 1 we discussed getting ‘sale ready’. We now move to formalising your relationship with a prospective buyer, agreeing the principal terms and assembling a team to support you in the transaction. In Part 3 (to follow) we will discuss the final phase; due diligence and legally binding documentation.
Share Sale or Asset Sale
If you operate through a limited company, we discuss the pros and cons of selling the shares of the company or the company selling its assets. If you do not operate through a limited company, you may wish to assess the potential advantages of incorporating your business prior to sale. Your tax advisor would be the first port of call for that discussion.
Under current UK tax rules, it is typical for a seller to sell shares rather than the company sell its assets. The sale of shares is subject to Capital Gains Tax with the possibility of Business Asset Disposal Relief being available. The rate of tax by selling shares may be as low as 10% rather than potentially 27% where the company sells its assets, and the price is extracted from the company.
Aside from tax, sellers find selling shares useful in terms of a clean break as the corporate history is assumed by the buyer. Buyers, on the other hand, may prefer to acquire assets as they can cherry pick assets and liabilities.
Heads of Terms/Letters of Intent/Offer Letters/Term Sheets
The terms above (collectively ‘Heads’) refer to what is normally the first formal document signed by a seller and a prospective buyer. Except in specific circumstances, they are not intended to be legally binding but provide a ‘written handshake’ of the main terms of the proposed transaction. This is before detailed due diligence and sale documentation.
- Identify seller and buyer (particularly if the buyer is a group of companies).
- Identify what is being sold. In the case of shares, it is normally all of them and in the case of assets and liabilities the key ones can be listed.
- Identify the price. This can fall into several categories:
- What is the headline price?
- When is it paid (all at completion or is any deferred/retained)?
- What assumptions underpin the price?
- Is there a price verification/adjustment mechanism (Completion Accounts or Locked Box)?
- Is there an earn-out (future payments dependent on achievement of a metric)?
- Is the seller reinvesting all or part of the price in shares of the buyer (Rollover Shares) or receiving shares as part of the price (Consideration Shares)?
The two areas which are legally binding, either in the Heads or in separate documents are:
- Exclusivity. A period during which the seller will not attempt to sell to any other person. This gives the buyer time to conduct due diligence and negotiate the sale documentation.
- Confidentiality. An obligation on the buyer to:
- keep information it receives in due diligence confidential; and
- only use that information for the purposes of the sale.
In the full version of this guide, we discuss each of these areas (particularly price).
A typical team assembled by a seller comprises:
- Corporate finance. To assist in pricing the business, finding a buyer and being an intermediary between seller and buyer.
- Legal. This can be the existing legal advisor or a new advisor specifically for the sale.
- Accountancy. This is normally the in-house finance function with assistance from external advisors (typically those who are familiar with the accounts of the company).
- Tax. To analyse and recommend the most tax efficient structure for the sale.
Read the full version of this guide for more detail on the role and engagement of each team member.
This middle phase of the transaction ensures buyer and seller are of the same initial understanding as to the look and feel of the final anticipated transaction. Getting it right is important to ensure time and cost is not wasted through misalignment at the start.
Bear in mind that this is not the final transaction; there is a lot that can change through due diligence and changing circumstances – completion is likely to be weeks or months away. Your assembled team is there to support you through that journey.
Please note, this is a general guide. Specific advice, particularly in relation to tax, should always be taken.
Full versions of Selling Your Business: Part 1 and Selling Your Business Part 2 are now available for download.