The most common exit-route for business owners is a business sale. Whether you’ve always planned to sell your business, or would simply like to retire, it’s important to think ahead so that you can get the best price and avoid unnecessary stress, as selling a company can be time-consuming and complex.
Our overview of the process of selling your company will introduce you to the different ways you might want to sell, the circumstances around business sales and how these are impacted by the types of businesses involved.
- Different ways to sell a business – an introduction
- Selling different types of companies
- Selling a company in financial difficulty
- Selling a company to a single buyer (bilateral transactions)
- Selling a business at auction
Different ways to sell a business – an introduction
When selling a private limited company (we look at selling other types of businesses below), you have two possible routes to sale: a sale of the company’s shares, and a sale of the company’s assets.
A share sale involves the buyer acquiring all of the company’s shares, with the company continuing as normal with the buyer as the new owner. An asset sale involves the buyer acquiring all or certain assets of the company, and they may also assume certain liabilities associated with those assets. The target company is usually dissolved after the asset sale.
As a first step to either of these options, there are a number of things to consider:
- Do you own freehold or leasehold property? What other assets (like trademarks and patents or customer lists) will form part of the business for sale, and what assets might you retain after the sale?
- Have you obtained a professional valuation of your business?
- Are your business records up to date, and have you carried out essential housekeeping tasks recently like property maintenance and stocktaking?
- Do you have a good relationship with your bank, and are your payments and other liabilities like tax payments up-to-date?
- Have you taken advice on the tax considerations that should be borne in mind when deciding how to structure the transaction?
As well as getting a professional valuation, consider engaging a business broker, an accountant and a lawyer early in the process so that they can advise you the best way to structure a sale, and the best route to market. You will also need to consider carefully the tax implications of a sale of shares versus a sale of the company’s assets so that you make the right choice for you.
When you sell the shares in your company to a purchaser, the new owner obtains the whole company, including all of its assets and liabilities (property, employees, contracts etc). A share sale represents a clean break for you, as business owner, and minimises the hassle of dealing with each individual asset. On the other hand, a buyer of company shares will require that you give it extensive warranties and indemnities in the sale agreement so it is protected against any risks that are inherent in the bundle of assets and liabilities that are included in the sale.
Advantages of a share sale – from the seller’s perspective:
- As the owner of the property (the company as a legal individual in its own right) remains the same after the sale, you won’t have to convey each asset (if it’s a freehold or long lease) or deal with the landlord (if it’s a shorter business lease) and obtain consents (and potentially pay admin fees).
- You can keep the details of the company sale more private, at least in the early stages. You won’t need to tell customers and employees that you are thinking of selling the business, and avoid the disruption and any anxiety that that might cause.
- Any existing contracts you have, either as a supplier or as a purchaser, will often continue in effect after the sale.
- The employees will transfer automatically, so the Transfer of Undertakings Regulations (TUPE) won’t make the process complicated, and there will be no obligation to consult with employees.
- Liability to some taxes can be less with a share sale, as there won’t be property taxes like stamp duty, and corporation tax can be minimised.
- The seller achieves a clean break from the company and any liabilities.
Disadvantages of a share sale:
- In a sale of shares, the sale and purchase agreement will contain warranties and indemnities in the buyer’s favour, so that any liabilities that emerge after the sale, or that could not be accurately quantified at the time of sale (like outstanding litigation), will be the seller’s responsibility. These can be time-consuming and complex to negotiate.
- The due diligence process – the need to assess the extent of the assets and liabilities of the company pre-sale – can drag out, and you will likely need to set up a data-room that will contain all of your relevant documents and records relating to the business.
- You will need to audit all of the company’s contracts to see whether they contain change of control provisions that necessitate you getting the other party’s consent to the share sale.
- Shareholders may need to pay capital gains taxes on any profit made during your ownership of the shares.
- The selling shareholders will have to consent to the sale.
In an asset sale (selling the company’s assets rather than shares), the sales process is less risky for the buyer. The buyer (or buyers) will take ownership of the individual assets, leaving the company as a ‘shell’ which is then closed down after the sale.
Which assets are bought as part of an asset sale depend on the contract between the buyer and seller. Here are the most common assets sold as part of an asset sale deal:
- Customer records
- Plant and machinery
- Business premises
- Contracts of the business
- Intellectual property rights
- IT and IT systems and software
Advantages of an asset sale:
- The buyer can choose what assets form part of the transaction, and can leave some assets behind.
- As the risk to the buyer is reduced, there will be less time and expense negotiating complicated warranties and indemnities. The buyer is clear what bundle of rights and liabilities come with each asset and can assess the risk to them more accurately at the time of sale.
- The directors of the selling company can proceed to sell the business with limited involvement from the shareholders.
- The due diligence process can be shorter and less involved than a sale of shares.
Disadvantages of an asset sale:
- As you will be closing down the company, you will be transferring properties and assets, and so will need to contact third parties about the sale – this could negatively impact publicity and the control over the spread of information.
- If your business will be operating as a going concern after the sale, either in whole or in part, then TUPE is likely to apply. This means that employees are entitled to have their contracts of employment (and any rights associated with those contracts like unfair dismissal or pension rights) transferred to the new owner. You will have to consult with employees and take steps to ensure that their rights are protected, as well as enter into warranties and indemnities with the purchaser.
- Contracts with suppliers and clients won’t automatically transfer, and will have to be individually negotiated with the relevant third parties.
- Each property comprising your business premises will transfer separately, requiring separate negotiations and sales documents to be prepared.
- The tax situation for the seller can be unfavourable in terms of corporation and any capital gains taxes to pay. The buyer will also pay stamp duty tax on property transfers.
Selling different types of companies
Although the sale of private limited companies is the most common form of business sale, here’s a quick look at the sales process for two other types of organisation – the Limited Liability Partnership and the Public Limited Company.
Partnerships and Limited Liability Partnerships (LLPs)
If you operate your business as a partnership, whether as a general partnership or an LLP, a sale of the business will involve a sale of the assets rather than shares, as the structure of partnerships is different from that of companies.
Selling a partnership can prove more complicated than a company sale, because the assets may be held by different partners and partners may have different statuses. For this reason, some business owners decide to incorporate their partnership before the sale so the transaction proceeds as a sale of shares.
When you sell a partnership, you need to consider the following issues:
- Who owns each asset group? Whether that be individual partners or the LLP in the case of a limited liability partnership. Consider each asset group separately, for example property, goodwill, intellectual property and stock.
- How is the equity of the partnership divided, and how are profits shared? This may have an impact on the profits realised from the sale.
- Will all the existing partners retire from the business, or will some continue in the business?
- What are the tax consequences of the sale of the partnership?
Public Limited Companies (PLCs)
As the shares of PLCs can be bought and sold by members of the public, PLCs are subject to a regulatory framework that governs how these shares can be traded. The City Code on Takeovers and Mergers (‘The Code’) sets down certain principles that will dictate how a business sale must proceed.
The Code applies to all companies that are registered in the UK and who sell their shares through a regulated exchange like the London Stock Exchange. There are six general principles that apply to trading in their shares:
- All individuals holding shares in a PLC must be treated equally when it comes to a purchase of their shares. If a buyer obtains a controlling number of shares in a PLC, then the rights of the minority of shares must be protected.
- All shareholders must be given enough time and information to allow them to make an informed choice as to whether they sell their shares. The board of the PLC must provide a view on the effect of a sale.
- The board of the PLC must consider the best interests of the company, and let individual shareholders decide whether the bid is a good one.
- The market for the shares of the PLC must not be manipulated in any way which might create a false market.
- A bidder for shares in the PLC must make sure that they can pay for the bid.
- The PLC that is the subject of a bid must be able to carry on its business as normal, taking account of any pending bid for its shares.
The key differences between the sale of a PLC and a private limited company are:
- The purchasers of any shares will not receive the same kinds of warranties and indemnities that they would in a private sale.
- The due diligence process for the sale of a PLC is likely to be less detailed and faster than the sale of a private limited company.
- With PLCs, there is less likely to be private exclusivity arrangements (where a certain buyer is given first option to purchase), as these are prohibited by the Code.
- A purchaser of the shares of a PLC usually won’t be able to impose conditions on its offer to purchase shares.
- The buyer will need to have the purchase price in place prior to the sale, including a fully committed bank loan if applicable.
- All sellers of shares of a PLC will need to be treated equally, and none given preferential prices or other special arrangements made.
- Once a formal announcement has been made to buy shares of a PLC, the buyer is obligated to proceed to offer stage. Secrecy is maintained before the announcement of an offer so that trading of the shares of the PLC is not affected.
When a takeover is announced, shareholders of a PLC must be sent detailed information on the nature of the bid, and the identity of the bidder. In the case of a contractual takeover offer, a bidder that successfully acquires a set percentage of the shares of a PLC may be able to compulsorily acquire the minority stake in a company that remains. If the proposed takeover fails, then the bidder will usually be prevented from making another bid for at least a year.
Sometimes purchases of PLC shares will build up their holdings of a target company before they make an offer, or during the offer process. Detailed legal advice should be taken to avoid the danger of a claim of insider trading, or building up a stake that leads to the buyer acquiring 30% or more of the total voting rights, as special rules apply to these kinds of incremental purchases.
Selling a company in financial difficulty
Companies in administration
When an insolvent company goes into administration, it is often because the sellers hope that the business can be rescued and sold as a going concern.
You may consider administration where:
- Your company has severe cash-flow problems but it is still a viable company because it has valuable assets such as trademarks and reasonable trading prospects.
- You need a quick sale because the company is technically insolvent.
- You have not been able to reach a deal to restructure your debts with your creditors.
When an administrator is appointed, they will:
- Make sure the assets of the company are secured and properly insured.
- Notify staff and creditors that they have been appointed.
- Meet with the company’s directors to discuss the administration process
There are quite a few important differences between selling a company that is in financial difficulty or has gone into administration, and selling a solvent company. The main differences when selling a company in a poor financial position are:
- The timescale for selling the company will be accelerated because of the company’s difficulties, particularly because of cashflow issues and the need to continue to pay employees.
- The risk that the buyer will assume on any purchase is reflected in the purchase price, which will be lower than that for a solvent company.
- The administrator of a company in administration will have more limited knowledge of the company and its assets than the owners in a private sale. He or she will be less likely to be able to answer questions about them in the due diligence process, and the company will be sold ‘as is’, including any claims by third parties for which the buyer must take the risk without rescinding the sale or reducing the sales price.
- The sale documents for a company in administration are prepared by the administrator, are less likely to be negotiable, and will be weighted in favour of the seller in order to maximise the sales price.
- No warranties or covenants will normally be given by the administrator on its or the seller’s behalf. This would apply to real property like business premises, as well as to stock.
If your company has financial problems and is technically insolvent, but you haven’t been able to find a potential buyer, you could consider a business sale where all or part of your company’s business and assets are sold just before or immediately after the company goes into administration.
The advantage of this procedure, known as ‘pre-pack’ administration, is that the value of certain assets such as goodwill, or the company’s brand, can be preserved and a better priced obtained.
If no buyer for an insolvent business can be found, either in a ‘pre-pack’ sale or through an administrator, then the company will be liquidated and its assets sold to pay creditors. If a company is liquidated, then the court appointed liquidator will close down the business, end its contracts and collect any debts. He or she will then pay off creditors before distributing any remaining capital to the company’s shareholders.
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Selling a company to a single buyer (bilateral transactions)
Whether you decide to sell your business to a single buyer or put your business up for auction depends largely on the type of business you are in, the kinds of shareholders you have (private equity shareholders may prefer auction sales), privacy concerns, timescales, market conditions and the pool of potential buyers.
If you have chosen to sell to a single buyer and are ready to sell your business, there are certain initial steps you should take in preparation. Firstly, you should assemble a team of advisors to help you value your business and advise you on the best structure for the transaction, bearing in mind tax and other considerations. You should also make sure you have internal resources in place to help you deal with the sale, and gather together the information that the buyer will need as part of the due diligence process.
When you sell to a single buyer (a bilateral transaction), you will negotiate the sale of your business to a single buyer. A typical bilateral sales transaction typically involves the following steps:
- A period of exclusivity during which both parties agree to deal only with each other and enter into a confidentiality agreement so that no information that may be disclosed to the buyer during the initial phase of the company sale will be shared with third parties.
- Due diligence by the buyer of the company to be sold that will enable it to prepare the sale documents and negotiate terms like warranties and indemnities.
- Drafting and negotiation of the share or asset purchase agreement.
- Completion of the relevant documents.
Before you start the sales process, it’s a good idea to carry out internal due diligence. This will help you to identify any issues that might arise during the sales process that could complicate or delay the sale, such as consents that may be required and any hidden liabilities or difficulties. Due diligence will also help you prepare sales materials that highlight the benefits of the company, as well as prepare for buyer due diligence, like setting up a data room in which documents that will be open to inspection by the buyer will be available for review.
Selling a business at auction
Putting your business up for sale by auction may be your preferred way of selling, as it could result in an improved price if there are several interested parties. Also, auction processes could provide an advantage in that the seller has more control over the way the transaction proceeds, including how due diligence is conducted, how the transaction documents are drafted, and the timings involved.
The disadvantage of an auction sale for sellers is that where the market for your type of business is limited, you may not attract sufficient interest to make the process worthwhile. It may also not be appropriate if your business is very specialist or complicated, or where it operates in a highly regulated market. Your costs to sell a business at auction are likely to be higher, bearing in mind the need for specialist advisors. Management time and costs will be increased, and the auction process will inevitably lead to some disruption in normal business operations. Finally, if the auction process is not successful, this information will be public, and may impact your ability to sell in future.
For buyers, auction sales are generally less favourable than bilateral sales, because they may end up paying a higher price, and the deal terms can be less favourable.