The business sale process demystified

When I speak to business owners about buying their business, one of the most common things I talk about is the actual process of how it works. Most business owners do not know, and why would they? Most business owners work in their business for years and only think about selling when it comes to retirement so when it comes to selling their business it is all new to them.

What I am going to describe below is a rough process for a share sale. I have not personally been involved in an asset sale so do not feel qualified to write about it but having been on both the sell side and the buy side of share sales I will go through the rough steps below.

In my experience, a deal follows a rough process as follows but as almost every transaction is different, and different solicitors will have different ways of doing things, it may not be the way every deal goes:

1)     The buyers and sellers get together – it can happen in a multitude of ways. Some sellers use brokers to advertise their businesses, some buyers approach sellers directly, some advertise on LinkedIn, etc, etc but at some point the stars align and the right buyer meets the right seller and agree deal…

2)     The buyers and sellers will agree a broad deal structure including total amount to be paid (total consideration), payment terms (such as deferred consideration details) and any other deal specific conditions such as handover arrangements. These details are summarised into the Heads of Terms (HoT) document signed by each party.

It is worth noting that signing HoT doesn’t mean that the transaction will definitely go through. I signed four HoT last year but only one deal completed (Twice the owners pulled out due to changes in circumstances and the other couldn't proceed due to a personal guarantee on a loan which couldn't be re-assigned). Due diligence may throw up some issues that puts the buyer off, the parties may not agree a Share Purchase Agreement (SPA), banks may refuse funding, the seller might get cold feet etc. I view the HoT as a solid commitment that each party will use their best endeavours to do a deal and are comfortable incurring fees from this point on. 

3)     The parties appoint solicitors. Usually, the buyer will appoint a solicitor to do legal due diligence (DD) and draft the SPA, and appoint an accountant to financial DD. You can even appoint firms to do other forms of DD such as commercial or operational, but this is more likely on larger deals. I tend to do my own commercial due diligence.

I would always suggest appointing a solicitor who specialises in corporate transactions as they know what they are doing and enable a smooth transaction. A jack of all trades High Street solicitor will most likely not be familiar with the key risks and usual contractual clauses so will either miss key bits or quibble over every punctuation mark.

4)     The buyer’s solicitor and accountant will compile a list of questions and requests for documents on which to do their DD and then inform the drafting of the SPA. On the financial side it will include basics like management accounts, bank statements, aged debtors and creditors. When I sold my business in 2017 we had to produce various sales analysis reports which had to be manually cobbled together which was time consuming. On the legal side, it will be all shareholding information, leases, customer contracts, employment contracts etc.

Pulling all this information together can be a pain if you aren’t organised. Good practice for any business owner is to keep a central filing system of all key documents, especially if you want to keep the sale confidential and don’t want to make staff suspicious when you are hunting through filing cabinets looking for the Health & Safety Policy.

5)     The buyer’s solicitor and accountant will go through all the information and perform their DD. Financial due diligence (FDD) is basically checking that the figures in the accounts are verifiable and identifies key financial risks to the buyer. Legal due diligence (LDD) goes through all contractual and legal risks.

6)     Once DD is complete the buyer will either proceed with drafting the SPA, or if there are any nasty liabilities or other deal breakers uncovered during DD they may try to renegotiate the deal or walk away. I would advise sellers to be as transparent and open as possible. Business buyers tend to have run businesses before so know that bad debts occur and not all staff are brilliant so its best being up front so the buyer can make informed decisions, rather than potentially ruining a deal if something nasty comes out of the woodwork later down the line.

7)     Assuming the DD hasn’t put the buyer off, then the buyer’s solicitor will write the first draft of the SPA. Normally, this is a very long and incredibly boring document written largely in a language only solicitors understand. It is in effect the sales contract between the buyer and seller. It will set out the deal structure and the terms and conditions of the sale.

When the seller sells their shares, they achieve a complete break from the company and no longer own it, but the buyer will usually insist upon some contractual promises about the company (warranties) in the SPA.

A note of caution here. If you pay your solicitor on an hourly rate, they could make the SPA as complicated and detailed as possible to increase their fee. Try to get a fixed fee to save you money and ensure an easier transaction!

8)     The seller’s solicitor will review the SPA and make amendments as they deem necessary. A game of SPA tennis then ensues where the SPA gets passed back and forth between each of the party’s solicitors who make amendments until the SPA is finalised. Another note of caution – keep your eye on legal fees and keep the number of iterations to a minimum. If you have any red lines, I find it best to discuss these directly between the buyer and seller as you are more likely to find amicable solutions than you would by going through solicitors. 

Agreeing the SPA can be complicated, and you may find yourself negotiating a handful of legal clauses and having to agree to accepting some risks. This can be the most stressful part of the process because the solicitors will highlight all the things that could go wrong and try to put you off the deal. My advice is to listen to your solicitor, then think about the probability of the risk occurring, and what would be the impact if it did. If the probability and impact are low then it is probably not worth losing a deal over.

9)     Once the SPA is agreed then we are nearly at the finishing line and the solicitors will handle this. They will have to prepare various completion documents to ensure the shares legally transfer. The only other significant seller input is the disclosure documents whereby the seller formally discloses information to the buyer against certain warranties. For example, when I sold my business, I was asked to warrant that all of the inventory in the business was not damaged, slow moving, obsolete, unusable or of limited value, and I disclosed that a certain percentage of this inventory was slow-moving so that the buyer was unable to claim against this disclosure. This step is a bit of a faff as all of this would already have been shared with the buyers during DD, but it needs to be legally documented.

10)  Completion. Once all is agreed, lots of documents need signing and money needs transferring. Legal ownership has changed hands. Time to open the bubbly?

11)  Post completion. Depending upon what was agreed, the seller will sail off into the sunset or may have to do a handover period. The buyer will start the next challenge which is running their new business. 

I hope I haven’t put you off! As I said at the start, every transaction will be different and there will be other levels of complexity depending on the nuances of each deal but the above process will be broadly followed in most cases. 

About the Author

Having previously worked as a Charted Accountant in Corporate Finance before running and then selling his family business, Daniel is now building a portfolio of businesses through acquisition. Typical target companies are in the manufacturing and wholesale sectors with turnovers of between ￡1 and ￡5m.

If you want to discuss selling your business, or know someone who does, you can contact Daniel via LinkedIn, or ask any questions in the comments box...