8 pitfalls business owners looking to sell their company should avoid. An OnHand Counsel Introductory Guide
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Along with your house and pension, owning a business can be your biggest asset. You can’t take it with you when you retire, so unless you want to keep it in the family, or just close it down when you retire, you will probably want to sell it one day and spend the money (or build another business!).
From a business owner’s point of view, selling your company could be extremely simple. All you need to do is find a great buyer, agree a great cash price, hand over a share transfer form, get cash on the nail, resign as a director, and walk away into the sunset with no ongoing risks or liabilities. What could possibly go wrong?
Sadly it doesn’t work like this in practice! It can be hard to find a buyer and to get a good price. Any buyer you do find will then want to protect itself in all sorts of ways. Selling a company can therefore be a complicated business, and can take a long time to arrange, negotiate and document. The average share purchase agreement (‘SPA’) produced by a buyer’s solicitors is over 70 pages long.
Most business owners don’t get to sell a company more than once in their lifetimes, and don’t know what to expect. It’s way outside their comfort zone. From preparing to get your company oven ready for a sale, to early negotiations with interested buyers, and dealing with all the challenges that buyers are going to put your way, you need an experienced specialist corporate lawyer on hand to guide and help you.
Here are 8 pitfalls you need to watch out for
1. Failing to plan for an exit
Over the years I have come across so many business owners who through lack of planning or focus have failed to get anything like the value they could have obtained for their business, or even worse, failed to sell it at all and had to wind it down (and up) on retirement.
Try not to fall into some of the traps I have often seen owner managers fall into…
2. Getting off on the wrong foot
Once you’ve found potential buyers who have expressed an interest, you need to make sure you take control over protecting your interests. Amongst other things this includes managing the process of getting to an initial Heads of Terms. Failure to do so can cause a lot of grief and a lot of wasted time and cost. For example…
3. Shares or assets? Not understanding what you are selling, and the implications.
The differences between a share sale and an asset (business as a going concern) sale are fundamental, yet often clients come to me having not thought about them…
4. Not getting paid – meeting the buyer’s financial conditions
Your buyer is going to agree a price based on various financial assumptions it has made. It will want to be protected (ie pay less) if these assumptions are proved wrong. There are various different ways in which a buyer may want to protect itself in the SPA. As a seller, you have to be able to respond to whatever protections the buyer asks for.
These assumptions broadly revolve around two areas – the company’s financial position at completion, and the earn-out…
5. Not getting paid – the deferred payment
Sometimes a buyer will try to avoid having to pay the full purchase price up front. If so, you have to think about the risks and how you can reduce them and protect yourself…
6. Not getting paid – getting shares in the buyer instead of cash
On occasion a buyer will offer some or all of the purchase price by way of issuing shares in the buyer (or a holding company) rather than in cash. An experienced corporate lawyer can help you to assess any such proposals and negotiate the best ways to protect yourself…
7. Getting sued and having to pay back – warranties and indemnities
Much of the time spent negotiating and documenting the SPA is usually spent on the warranties and the disclosure letter (which effectively forms part of the SPA), and on any indemnities the buyer might want. Any breach of these can result in a claim by the buyer for you to repay some of your purchase price. As a seller, you want to try to manage the whole deal process in a way that minimises the risk of any warranty or indemnity claims…
8. Not using the best advisors for your deal
Selling your business is usually the biggest deal you will ever do in your life, so it’s important to find the best advisors (lawyers, tax advisors, accountants) for your kind of deal….
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What next?
A good corporate lawyer can help you anticipate and address all these pitfalls and more, so that when you’re ready to start thinking seriously about selling your business you have all your ducks in order and are in position to secure the best possible deal.
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Contact me for a complimentary ‘Preparing to sell your Business’ consultation:
Whether you are already speaking to a potential buyer of your business or you are thinking about looking to sell it some time in the future, if you would like to discuss the possible sale of your business or any of the issues raised in this Guide or any other issues which you think might affect you in relation to a sale of your business please email andrew.james@onhandcounsel.co.uk to arrange a complimentary ‘Preparing to sell your Business’ consultation to help you to identify what might be involved and how Andrew can help. This will help you to avoid some of the pitfalls you might otherwise be exposed to, such as those described in this Guide, and give you the peace of mind of knowing that you have an approachable competent corporate lawyer ONHAND who can provide you with experienced, effective and cost-effective advice and assistance.
See here for more about the unique benefits of working with Andrew James of OnHand Counsel: https://www.onhandcounsel.co.uk/benefits/
If you are already at the stage where you are discussing possible Heads of Terms with a potential buyer DO NOT sign anything before you have obtained legal advice from a competent corporate lawyer. Have a look at this FAQs about Heads of Terms
https://www.onhandcounsel.co.uk/guide-and-tips-favourites/heads-of-terms-faqs/
and email andrew.james@onhandcounsel.co.uk if you would like to have an initial complimentary ‘Preparing to sell your Business’ consultation.
