As a business owner you’ll be well versed in selling your products or services, but what happens when it comes to selling the company itself?
Buyers will be buying future prospects, but they’ll also be taking on a range of risks which they’ll want to understand and manage. Some of this will be strategic stuff and some of it will stem from nitty gritty detail and can come from a multitude of directions. Selling a company therefore tends to be a complicated and often protracted process.
So what happens when you sell a company? While each deal is different, in this article I set out typical steps in the sale process and most of the jargon that you’ll encounter.
Buyers will need information about the business so they can then make a reasoned offer:
- Where a buyer makes a direct approach this would typically be through fact-finding discussions and direct requests for information.
- If a business broker or corporate finance advisor is marketing the business to a number of potential buyers, it is likely to first be through an initial one page ‘teaser’ document. The advisor will then send a more detailed information memorandum with key financial and commercial information; and then potential buyers will submit bids.
Either way at an early stage buyers should be expected to sign a non disclosure (or confidentiality) agreement (or NDA).
Expect to be asked to grant a preferred buyer a period of exclusivity, which will prevent you from negotiating with anyone else interested in buying the business. This will typically happen once you’ve agreed the bones of a deal.
Heads of terms
This is a document drawn up by lawyers setting out the key aspects the deal. It demonstrates intent without being legally binding. However, the document is very important as it forms the basis for working towards a final contract.
A data room is a depositary where information is provided to the buyer. It used to be a physical room with paper files, although it will now be in the Cloud. Data rooms can be used to provide information to potential buyers before they finalise a bid; they are also used to provide further information for due diligence.
Accountants and lawyers will investigate the company’s financial and legal affairs. It will cover (among other things) accounts, tax, often financial forecasts, compliance with laws and regulations, ownership of key assets and also customer, supplier and employee contracts. Due diligence should look at both the past and things that will impact on future performance. Sometimes other professionals, such as IT consultants or industry specialists, will carry out other types of due diligence.
Issues that come to light can lead to protections being built into the deal, a renegotiation or worst case the deal collapsing.
Be prepared for a lot of time to be spent providing due diligence information and dealing with queries.
Cash surplus or shortfall
Often companies are sold on a debt free/cash free basis. This means that a headline value is agreed for the business and then any cash that’s considered surplus to business requirements is added (or any shortfall deducted). Calculating and agreeing the cash surplus or shortfall is often a tricky area!
Having gone through due diligence, the terms of the deal will be set out in a contract (the share purchase agreement or SPA). As well as setting out the price and the timing of payments it will also include:
- Indemnities – which specify particular risks which are of concern to the buyer. If a problem occurs after the deal has been done then you’ll need to reimburse the buyer.
- Warranties – which are declarations about the affairs of the business. They largely indicate that things are in good order, for example that all amounts included in debtors are recoverable, or that there are no employment law disputes.
If a loss arises on a warranted item after the deal then the buyer may be able to claim against you. The disclosure letter is the buyer’s opportunity to restrict the warranties; eg, if the seller discloses a particular unfair dismissal claim then the buyer should be unable to make a warranty claim should a loss arise.
The contract will typically cap the total warranty liabilities and also include a minimum amount for individual warranty claims.
Completion and afterwards
It’s normal practice for exchange of contracts and completion to happen at the same time. Deal structures will vary:
- In some cases there will just be a single payment.
- Often an initial payment based on estimates is at made at completion, with an adjusting payment shortly afterwards. Either the buyer’s or the seller’s accountants will prepare completion accounts and then the other side’s accountants will check them; agreement of the figures will enable either you or the buyer or to make the adjusting payment.
- Some deals may factor in payment by fixed instalments. Others include an earn out element, with payments based on future performance, usually requiring more accounts to be prepared and for them to be agreed between accountants.
The contract should include time limits for making warranty or indemnity claims and these would need to be assessed and agreed.
A business sale is a rare event for most business owners and also for many accountants. I hope this article has helped demystify the jargon. Expect any sale to be challenging; you’ll have to go through the process while running the business, so it’s really worth thinking whether the business has the bandwidth.
David Lewis can work with your internal accounting staff and external accountants as a specialist (partner level) resource to:
- prepare or review and properly present financial information to the buyer
- calculate the cash surplus
- liaise with the buyer’s accountants; his years of experience carrying out due diligence for buyers enables him to understand their perspective and pre-empt questions
- and help get the deal over the line
“David provided invaluable support during the financial due diligence phase of my business sale. His attention to detail is impressive, backed with clear advice and guidance making the whole process significantly less daunting. For me, the strongest part of his service is he really cares about his clients and behaves to all intents and purposes as one of the team. I would have no hesitation in recommending his services.”
PB – Director & Shareholder (software)
“Throughout the M&A process we found David Lewis to be diligent and professional throughout. Provided an essential service and honestly couldn’t have achieved the same result without him. Still very thankful for his work.”
JT – Managing Director & Shareholder (consumer goods)
“The deal is done. Thank you so much for all you have done during this often challenging time. We couldn’t have done it without you.”
NB – Director & Shareholder (software)