Client Guide to Selling Your Company by Way of Share Sale

We, at Bermans Limited (Bermans), are here to make our clients’ lives easier. We pride ourselves in working with our clients to ensure that our transactions run as smoothly as possible. Selling your company is an extremely important and personal decision and we are here to help with the legal process.

This high-level guide is intended to:

• prepare you as to what to expect from the legal process when selling your company;
• highlight key points that you will need to consider and steps that you will need to take in advance of selling your company; and
• explain some of the legal concepts and processes you will encounter during the course of the sale

This guide envisages that you have taken corporate finance and/or tax advice as to the best way to structure the disposal of your business and that you have determined that a share sale (i.e. the sale of the entire entity including liabilities) is the best way to dispose of your business.

This guide is a summary only and should not be taken as legal advice. Bermans’ corporate team has a significant amount of experience in working on share sales, acting for sellers and buyers, particularly in the owner managed business and small and medium enterprise space.

We would be happy to discuss this note and any of your requirements with you.

Preparation is Key

Much like the Scout motto, to “Be Prepared” is key when selling your company. Preparing as far in advance as possible (i.e. at least 12 months prior) when you are considering exiting your business will allow you to: (i) consider and resolve any issues; (ii) potentially enhance the value of your business; and (iii) ultimately save a lot of time and costs.

The preparation phase may include:

• taking corporate finance advice to, amongst other things, ensure that you will be receiving the best value for your company and assist with producing an information/sales memorandum to market your company to potential buyers;
• any individual shareholder(s) taking tax advice to ensure that they are planning ahead for and considering, amongst other things, inheritance tax and Business Asset Disposal Relief;
• taking accountancy advice to check what you need to be considering in terms of cash and debt in the business and working capital;
• ensuring that all of the company’s filings (including tax) and statutory affairs (such as at Companies House) are up to date and correct;
• ensuring that there is or will be up-to-date financial information available to be provided to any potential buyer;
• checking the company’s key contracts for change of control provisions and considering the proposed sale when negotiating key contracts (particularly in respect of termination provisions) with suppliers and customers (if applicable);
• settling any disputes in respect of the business that are ongoing – outstanding disputes will not be attractive to a potential buyer;
• taking into consideration any properties of the company and the accompanying documentation and whether those properties will be required by the company and a buyer going forward;
• ensuring that you have fully signed and/or complete copies of all the key documentation that a buyer will want to review as part of their due diligence exercise (as mentioned in more detail below); and
• considering whether any regulatory consent will be required to the proposed disposal, as a result of the change of control – this may have an impact on timing of

Trust the Process

The sale process from start to finish will take up a great deal of time and is likely to involve numerous meetings, intense negotiations and potential personal risk and reward for both the buyer and the selling shareholder(s).

Initial Stage

It is crucial to ensure that you have instructed a solid core group of professional advisors (at least accountants and lawyers) at an early stage of the sale process to assist in guiding you through the process.

Before sharing any information about your business with a potential buyer a legally binding confidentiality agreement or non-disclosure agreement should be entered into to ensure that any confidential information cannot be misused.

Consideration should be given as to which employees within your business need to be made aware of the potential disposal, not least to potentially assist with the process – the number of employees should ideally be kept as small as possible at the initial stage, not least to preserve confidentiality but also to prevent any unsettlement.

When you are at the stage of having received a serious offer that you would like to accept from a potential buyer, heads of terms should be entered into to set out the key terms that have been agreed between the seller(s) and potentially buyer in respect of the proposed sale. Such heads of terms are generally not legally binding (except in respect of exclusivity period, confidentiality, governing law and costs) but they are extremely useful and necessary to assist with ensuring all of the parties are clear as to their position in respect of key points relating to the sale.

A potential buyer will generally want exclusivity, that is to prevent the seller from entering into discussions with another buyer for a prescribed period of time. A buyer will be incurring a significant amount of time and cost in terms of due diligence and negotiations and will therefore want to ensure that they are not in competition with other prospective buyers. Such exclusivity will generally be negotiated between the seller(s)’ and buyer’s advisors.

Due Diligence

Any buyer who is interested in purchasing your company will want to carry out a due diligence exercise to not only allow it to determine whether it wishes to proceed with the purchase but also to validate the price it is paying for the company. Such an exercise will generally involve legal, financial, tax and commercial due diligence. A buyer essentially wants to ensure that there will be no nasty surprises awaiting it if it proceeds with the purchase.

You will need to collate the information a buyer requests as part of its due diligence exercise. Some of the information can be collated in advance, in conjunction with your corporate finance advisors and lawyers who will be able to advise the type of information a buyer will request. A

buyer and its advisors are given access to a data room to allow them to review the due diligence information.

“Let us never fear to negotiate”

At some point during the due diligence process the buyer’s lawyers will prepare a first draft of the share purchase agreement (aka sale and purchase agreement and SPA) – this is the principal sale document and will contain the key terms relating to the sale and purchase.

Examples of the key terms of an SPA include:

• consideration (aka purchase price) – the price you are receiving for the sale of your business will be at the forefront of your mind. Thought needs to be given as to how the price will be satisfied and the form of consideration payable (for example, cash, loan notes or consideration shares); whether the price is a fixed sum or subject to a price adjustment mechanism; and whether the price is to be paid in full at completion. Your accountants and/or corporate advisors will be heavily involved in advising you on this aspect;

• warranties – these are statements of fact relating to the target company and its business that the seller(s) confirm are true. If untrue, the purchaser can claim contractual damages to the extent that it can prove loss as a result of the breach of warranty. The warranties will usually be given subject to certain limitations including in respect of liability and time period. The seller(s) will also usually be given the opportunity to disclose to the purchaser pursuant to a disclosure letter as to why any of the warranties are not true;

• restrictive covenants (aka non-compete provisions) – these prevent the seller(s) from carrying out certain activities post-completion of the share sale. The provisions generally cover non-competition, non-solicitation and non-poaching. You, as seller(s), will want these to be as limited in scope and as short in time period as possible; and

• a tax covenant – this is to ensure that the seller(s) is liable to pay the amount of any tax liability for the period prior to completion, subject to certain limitations and

The SPA will usually be subject to substantial negotiation between the buyer’s and seller’s advisors and it will take a number of weeks to agree the final form. Both sets of accountants/corporate finance advisors will also need to be involved in the negotiation of the SPA particularly for the purpose of agreeing the consideration provisions and any purchase price adjustment mechanism.

Crack open the bubbly!

Once the due diligence has been completed and the SPA and other transaction documents have been entered into, it is time to crack open the bubbly and celebrate completion of the sale.

Bermans Limited