Insurance 2 June 2017

Six essential legal considerations when selling a business

Legal responsibilities when selling a business
An effective and competent team of advisors is important for any owner selling a business

For the final instalment in our series looking at the different legal responsibilities at every stage of the business life cycle, Katharine Mellor, a partner in the corporate and commercial team at law firm Slater Heelis LLP, outlines the key considerations owners should take when selling a business.

Understandably, many business owners are so caught up in everyday of running their business that planning for their eventual exit is overlooked.

However, selling a business is possibly the single most important decision that a business owner will need to take. With substantial personal and financial consequences, the journey towards the exit should be meticulously planned and all legal implications considered.

A clear business exit strategy is essential as it will help ensure that the right decisions are taken to maximise the value of the business.

How can you exit?

There are many ways to exit and many potential types of buyers. These include a sale to a family member, a management buyout by an existing management team, or a trade sale to another business. Business owners need to make sure that they consider all the various possibilities.

Usually a corporate exit will be carried out by one of two routes:

  • Selling shares of the company – so the money is obtained directly
  • Company selling its business/assets to the buyer – so the money is obtained through a dividend distribution (there will be a double charge to tax in this case)

The right exit strategy will depend on what the owner is trying to achieve – it is therefore important to consider the following.

  1. Tax

The tax implications should be considered and prepared for well in advance. There are several options for structuring a business exit and all should be explored to determine which is the best pathway to take.

The ideal structure may depend upon the availability of a capital gains tax exemption, the composition of the business’s assets and the relevant tax reliefs available.

It is therefore advisable to obtain tax advice as early as possible as this can provide you with sufficient time to explore any planning opportunities that may be available. Consulting a qualified and experienced accountant is strongly advised at this stage.

  1. Financial information

The buyer and their financial advisers will require access to hard numbers to work out what they are prepared to pay.

As such, any potential buyer will often request audited or unaudited financial statements for a certain number of years, together with supporting information regarding sales pipeline, cost of sales and other related financial and accounting information.

It is therefore extremely important for business owners to have open conversations with their accountants to ensure that all financial information is up to date. Business owners should also be prepared to be realistic about the value of their business based on this financial information.

  1. Legal agreements

Many commercial contracts include a clause which either requires the consent of, or notice to, the counter-party prior to the sale of all, or substantially all, of the company’s assets or a change of control of the company.

It is important that all contracts are carefully reviewed to ensure that any clauses that need additional actions are noted and, if possible, addressed before the sale proceeds. Failure to do this early on could cause significant delays – or even risk the viability of the transaction – during the engagement part of the sale.

  1. Employee Issues

A transfer of a business and/or its assets involves a “TUPE Transfer” – regulations to protect employees’ rights when the organisation or service they work for transfers to a new employer.

This requires engagement and detailed consultations with employees prior to any deal, including providing information on when and why the transfer is going to take place; any social, legal or economic implications for the employees for example a change in location or risk of redundancies; and information about any measures the incoming employer is considering taking in respect of affected employees.

A careful review of applicable employment legislation and employment agreements in place can assist in determining any termination costs, and help guide the exit strategy.

A sale of shares can usually be kept confidential until the deal is done as there are no specific legal implications for staff.

  1. Assets

A potential buyer will want to see evidence of ownership of all assets that are being transferred as part of the sale. A common issue that many owners face when selling a business is that the intellectual property and/or real property is often in their own name, or that of a related entity, as opposed to the company name.

To be sold as part of the transaction, documentation needs to be in place to cover the company’s position e.g. a lease of premises. Before doing this, the accountant will need to assess the relevant tax and other implications of transferring those types of assets.

Leaving this until the engagement part of the sale process presents substantial risks, most notably the prospect of the registered owner of such assets using the impending sale to ask for a higher price for their transfer.

  1. Debt

If there are any loans, the terms need reviewing to determine whether a sale of the business would trigger any provisions which could adversely affect the business – such as an early repayment penalty.

In the end, every business is unique and the legal issues that arise when planning for an exit can be complex. Decades of demanding work and determination all boil down to those precious months when the exit process takes place.

It is important for business owners to ensure that they have an effective and competent team of advisors to assist with the sale process. Appointing a highly experienced commercial solicitor is strongly recommended.

Katharine Mellor has over 40 years’ experience advising on acquisitions, disposals, fundraising, private equity and public market transactions for a wide variety of clients.

For further advice on selling a business, take a look at our related content:

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