The decision to sell a business can be one of the most significant decisions an owner makes. After investing time, money and energy into building a business, it is important to adequately prepare in order to secure the best deal possible on exit. Once you have decided to sell, consider an exit strategy as early as possible. A key decision is whether to sell the shares or the company's assets; there are advantages to both, and we recommend that you take advice before deciding.
This blog outlines five steps to take when selling the shares in your company.
1. Prepare early
The entire sale process can take, months, potentially even years, depending on the nature of the business. It is essential to be as organised as possible from the outset and think from the perspective of a buyer when addressing key areas of risk.
One way of doing so is to conduct internal due diligence to flush out any potential surprises before they surface further down the line under the watchful eye of the buyer. This is also a valuable information gathering exercise. Having information such as key contracts, financial, accounting and tax information readily available will help the diligence process run more smoothly and allow any issues to be identified and addressed at an early stage. Corporate legal and financial advisors have a wealth of experience advising on the sale process and can guide you on the information typically requested by potential buyers.
In terms of personal preparation, a sale of a business is often a significant wealth event for owners, resulting in the conversion of shares or business assets into a sum of cash. If the intention is to gift or transfer value to your children or others after the sale, take advice well in advance of the sale, so that you do not inadvertently lose the benefit of tax reliefs that might otherwise be available. It may be beneficial for certain steps to be taken before a sale has been agreed, so it is important consider these matters early. You should also review your will to take account of your changing circumstances.
2. Review company structure
If you are selling the company shares, the buyer will acquire all assets, liabilities and obligations of the target company. You may want to consider whether there are any wholly owned subsidiaries or investments, for example, that you want to carve out of the sale.
You may need to take pre-transaction steps such as consolidating share classes, re-housing certain subsidiaries or managing divestments to ensure the business is in the best shape to be sold. It is important to factor any preparatory work into the timetable from an early stage to keep the deal on track.
For example, there may be ex-employees who still hold incentive shares, or shareholders in a family business who do not have a day-to-day connection with the business. Reaching out to these individuals and transferring the shares back to the company in time for completion can be time consuming.
3. Environmental, social and governance (ESG) considerations
Corporate buyers and investors are increasingly looking to enhance their ESG credentials to build value for their own business and its stakeholders. While ESG factors are more heavily scrutinised within certain industries, buyers across all sectors will want to ensure that the ESG standards of the businesses are aligned to facilitate as smooth an integration of the target as possible.
While companies of a certain size have statutory ESG reporting requirements , those who do not should have clear internal ESG standards and targets. These could include steps taken to reduce energy consumption, demonstrating effective corporate governance and outlining social initiatives, all of which could positively impact the reputation and value of the business.
4. Valuation and structure of the deal
When setting about valuing your business, you should always seek advice from corporate finance advisors. A realistic asking price for the business means it should stand up to scrutiny and be supported by evidence in the due diligence process.
You should also work with corporate finance advisors on the structure of the deal itself before you look to negotiate the heads of terms. More recently, there has been a shift in deal structures towards earnout and deferred consideration mechanisms so risk around future earnings and valuation is more evenly shared between the buyer and seller.
At the heads of terms stage, the seller is the party in the strongest position. You should negotiate all material terms with the input from your lawyer to ensure that they are clearly drafted. This may help reduce the risk of the buyer attempting to renegotiate the price or any other terms at a later date.
5. Assemble a deal team
It is essential to have a strong management team in place before any sale. The process of selling a company is particularly time consuming, so you should make sure that you have people in place to manage the day-to-day running of the business. If you plan to exit the business following the sale, it is critical to obtaining best value that you have created and implemented your succession plan well in advance.
Limit knowledge of the sale of the business to the management team and other key personnel as far as possible. During the sale process you will want to keep as many parties as you can on side - setting an internal 'transaction loop' is important to ensure that the transaction is announced in the right way and at the right time. It can impact relationships with employees and suppliers alike if information is shared prematurely.
You should appoint a team of trusted and experienced professional advisors at an early stage to manage the transaction. Having a negotiator in place from the outset helps to maintain the relationship with the buyer and to guide you through the stages of the transaction to completion.
How Brodies can help
The Brodies corporate and commercial team has significant experience of advising on both buy and sellside transactions. We draw on the expertise of specialists from across our firm and work in close collaboration with our tax, real estate, employment, banking, pensions, IP/IT and other colleagues to deliver a complete service.
If you have any questions in relation to the matters discussed in this blog, or wish advice in relation to your business please get in touch with corporate partner David Lightbody, or your usual Brodies contact, who would be happy to assist.