Why use a solicitor to sell your business?

Posted
AuthorAlex Kilby

It is essential to take correct and accurate legal advice to avoid any comeback and any ongoing liability once you have disposed of your business.

Here at Devonalds we have years of experience of dealing with all manner of commercial law and business matters, so get in touch with us today on 01656 665022 for assistance.

Our Partner Alex Kilby who runs our Bridgend office outlines some good reasons why you should have proper legal advice when selling your business.

1. Share or asset sale
The two main methods of structuring the sale of a business are to dispose of the shares or the assets. The two are fundamentally different and here at Devonalds we can advise on the advantages and disadvantages of each from a legal perspective.

Without proper legal advice, it’s all too easy to end up transferring the assets of the business whilst still being responsible for all contracts that the business has entered into. This would leave a situation where you end up having to pay suppliers for goods and services rather than the buyer.

2. Confidentiality

During the sales process, the buyer will have access to a large amount of information about the business, which you might want to keep confidential. Here at Devonalds we can draft a binding agreement preventing the prospective buyer from disclosing this to any other party.

The types of information that a buyer will see are customer lists, full accounts (not just those available at Companies House), prices, profit margins and marketing strategies. If there is no confidentiality agreement in place and the deal falls through, you will be powerless to stop the buyer from using that information to gain a big advantage in competition with you.

3. Exclusivity agreement

The buyer may want a period of exclusivity to complete the purchase. Here at Devonalds we can negotiate this to ensure that, once this has expired, you can negotiate freely with other parties.

If you are not represented by a solicitor, then it is likely you will be locked in to negotiations with one party for a long period and, if another buyer offers a higher amount for the business in the meantime, it will not be possible for you to accept this.

4. Heads of terms

Once a sale is agreed in principle, it is normal for the main terms to be set out in writing, called ‘heads of terms’. We review these at the outset, as it can be much more difficult to renegotiate terms later on in the process.

Heads of terms are not usually legally binding although there are circumstances where they can be. You could be devastated to find that, although you intended to sign a preliminary agreement and continue to negotiate the details, the heads of terms actually constituted a legal contract. In such a case, the buyer can force you to sell even if you later decided not to go ahead.

5. Due diligence
Once the heads of terms are signed, the buyer will start the process of ‘due diligence’ where the buyer obtains all information relating to your business. This is a very lengthy and laborious process, and a minefield for the unwary. To attempt to deal with this without the assistance of a solicitor is a very risky strategy that could affect both the sale price and cause problems in the future if anything is missed.

Sellers are often surprised by the detailed information that the buyer and their advisors want to see. You may think a piece of information is unimportant and not check carefully enough before providing the information. If you do this, you could find that after completion, the buyer sues you for ‘non-disclosure’ or ‘misrepresentation’ claiming huge losses and forcing you to incur heavy legal fees. You will end up having to pay back a chunk of the sale price to the buyer or in court costs.

6. Approvals
Various approvals will be required for an asset sale. For example, if there is a lease, the consent of the landlord will be required to assign to the buyer. We will identify at an early stage if any 3rd party approvals are needed and ensure they are obtained in good time before completion of the sale.

If you cannot get consent to assign the lease of the business premises and sold the business anyway, you could end up having to pay the landlord rent for the rest of the lease and to repair the property instead of the buyer.

7. Warranties and indemnities
Purchase agreements generally include a list of promises that you give called ‘warranties’ and ‘indemnities’.

For example, the buyer will insist that you give written assurances that all of the information supplied is accurate and that you have a good and marketable title to the assets (i.e. own them outright). In addition, the buyer may require an indemnity to cover the costs of certain future liabilities of the business (i.e. promises that you will pay these). We will look to put a limit on any claims that can be made by the buyer following completion.

An example of an indemnity to watch out for is where you agree to pay any future costs for contaminated land. You might not be aware that you have agreed to pay what could easily run to £½ million or so!

8. Disclosure
A ‘disclosure letter’ is put together by us at Devonalds. It is a very important document, as the letter qualifies any warranties you give in the purchase agreement. The effect is that the buyer will be unable to take any action against you in relation to the general and specific issues disclosed in the letter.

You might not know what needs to be included in the disclosure letter and will, as a result, be left exposed. Take a situation where the purchase agreement includes a warranty that the business is not involved in any litigation. If there is actually a dispute with a customer, the buyer will look to you for recompense following completion to cover any costs.

9. Post sale restrictions
The buyer will want to protect the business it has purchased and will look to include restrictions on you that fall into three basic categories. These are non-solicitation of customers, non-solicitation of employees and not to compete with the business.

We will ensure that these are reasonable. Otherwise, you might be faced with a claim for a court injunction to stop you working for another company and not be able to earn a salary, and this could involve you having to pay a 5-figure number just to defend the claim.

10. Generally

The examples in this blog are worst case scenarios but they do happen regularly. Some people, when coming to sell their business, will take the view that a solicitor is an unnecessary expense. This could not be further from the truth as a good solicitor can help maximise the sale price, make the process much quicker and stress free and ensure that the seller is not left at risk of being sued after completion.