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Deal structure: sell shares or assets?

Whether you operate as a company, sole trader or partnership, a buyer will typically want to cherry pick your business assets and leave most liabilities behind. But if you operate as a company, you and your shareholders (if any) have the choice to sell your shares instead. This means the buyer will take the whole company ‘warts and all’, including all its liabilities, and you (for the most part) get a clean break.

In some cases however, it might be best for both parties to run with a share sale. A solicitor will look at a number of factors, such as:

• any unique licences or contracts the your company has;
• your tax position (or recommend a tax expert to help);
• the type of business you’re selling; and
• the circumstances of the sale, including your bargaining power.

Either way, it’s one of the first decisions you should negotiate and agree with the buyer. Changing the structure mid-way through the deal is frustrating for all parties (including any financiers) and will cost a small fortune in extra legals.

Preliminary Documents

Whether you structure your transaction as sale of shares or assets, there are a few preliminary documents that come into play when you sell a business.

Heads of Terms

The principal terms of the deal are usually laid out in a framework document, called a Heads of Agreement (“Heads of Terms”). They are often “subject to contract” meaning that apart from any ‘exclusivity period’ that you might offer or any confidentiality obligations, neither party is bound by its terms. While it’s meant to be an outline, it will still include quite a lot of detail, from price, premises, IP, warranties and indemnities, earn-outs, conditions for completion and more.

Confidentiality Agreement

Confidentiality clauses can be included in the Heads of Agreement or as a stand alone confidentiality (or non-disclosure) agreement. Either way, signing up all parties to one of these early in the sale process will keep the pending sale under wraps. Plus, if the sale doesn’t go ahead, the sensitive information you’ve learnt about each other during the process will be protected. (Learn more about non-disclosure agreements here.)

Vendor Due Diligence

You might be familiar with the term ‘due diligence’ (or ‘DD’ for short) which is essentially the buyer’s solicitors and advisors doing an audit of your business for legal and financial risks. But sellers can (and should) conduct their own form of ‘vendor due diligence’. This can speed up the sale process and reduce costs compared to buyer-initiated due diligence process.

Another advantage is that it allows you to provide a standard pack of information to multiple parties to attract firm bids for the business. It also gives you stronger control over the information flow. For example, it can reduce the amount of confidential material that needs to be disclosed to a potential buyer who might also be a competitor.

However, buyers will still seek extra information beyond what you’ve provided, so be prepared for that. They can also be weary about your advisers controlling all the DD as they might feel you’re having too much influence in the sale process.

A typical due diligence pack prepared for buyers might include:

• Financial accounts: copies of your audited accounts and directors' reports for the last five financial years.
• Contracts: copies or details of any agreement, contract, transaction, obligation, commitment, understanding, liability or arrangement.
• Business assets (excluding premises): a list and details of all business assets.
• Premises: a schedule of all owned freehold and leasehold properties, details of leases, tenancies or licences to occupy.
• Employment: an anonymised list of all employees and directors.
• Pensions: details and copies of relevant documents relating to any pension scheme(s).
• Intellectual Property Rights: a list and copies of documents relating to all intellectual property rights.
• Litigation: details of any ongoing or threatened litigation, arbitration, mediation or similar proceedings or disputes with third parties occurring in the last 5 years.
• Insurance: details including certificates of currency for insurance arrangements that you have in place.

With the buyer’s solicitors and advisors pouring over every detail of your business, they’ll inevitably find a number of issues and risks in your business - after all, that’s the whole point of due diligence. These issues will then be dealt with in the main transaction document, being the asset purchase agreement or share purchase agreement, depending on your deal structure of course.

And because the buyer is looking to protect themselves from the risks they’ve found in your business, it’s customary for their solicitors to draft the first cut of the agreement. If you’re selling assets, read on. If you’re selling company shares, skip to the next part.

Asset Purchase Agreement

The asset purchase agreement should detail exactly which assets are being bought (e.g. machinery, stock, customer/supplier contracts, premises and intellectual property).

A standard asset purchase agreement will also generally cover:

• Goodwill
• Creditors/debtors
• Employees
• Contracts
• Warranties
• Assignment provisions (or separate Deeds of Assignment)

If business premises are involved, you might also need:

• a Transfer document (required)
• Landlord consents
• Personal Guarantees
• Licence for early possession

Share Purchase Agreement

Selling company shares? Then expect to receive a draft share purchase agreement from the buyer’s solicitor.

And because they’re buying your shares, meaning they’ll by default be exposed to all your company’s liabilities, the buyer will include as many protections as possible. These protections will come in a variety of different legal forms, such as:

• Warranties;
• Indemnities;
• Limitation of liability; and
• Restrictive covenants.

You'll also separately prepare a:

• Disclosure Letter: which acts as a qualifier to the warranties you’ve given; and
• Tax Indemnity: which states that your company’s tax liabilities have been dealt with correctly and properly provided for in its statutory accounts.

Top tips when selecting a solicitor for your business sale

Start shopping early. It can take several weeks to find and hire the right commercial solicitor for your business sale. Don’t wait until you’ve hashed out a ‘non-binding’ heads of terms, because some parts of it will be binding. Plus, if you hand your solicitor a heads of terms that fails to protect your interests, you’ll look like an amateur if you insist on changing the terms because your lawyer was late to the party.

Find an expert. There are commercial solicitors that specialise in buying and selling businesses – take your time to ask them: “How many businesses have you helped your clients sell? How many were in the same or similar sectors as mine?” If you’re selling assets involving property, drill down on their property expertise or how they’ll handle the property components if they themselves don’t have the expertise.

Get a fixed fee quote. Any experienced solicitor who has completed enough business sales can give you a fixed quote. They’ve seen it all. They know exactly what’s in and out of scope. And they’ll be able to clearly explain not only their own professional fees, but also any ‘disbursements’ such as government fees, taxes and search fees that might arise when selling a business.

To make sure you get the best advice for the right price, Lexoo gives you multiple fixed fee proposals from panel of solicitors who specialise in business sales, within 48 hours. The service is free - give us a try!

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