Selling a business can be expensive, complicated and time-consuming, and may also have significant tax implications, so you need to plan carefully and get the right advice at an early stage. In this series of briefings, we will explain the full process of how to sell your business.
Here, we go into the legal process.
Heads of agreement
Once the parties have agreed a deal in principle, they will often draw up heads of agreement. These are also known as heads of terms, an offer letter or a letter of intent.
The heads are designed to identify the main issues (e.g. deal structure, price and time-table) and act as a ‘route map’ for the rest of the transaction. They will be treated as legally binding unless stated otherwise, so if you do not want to be committed to the deal until you have signed a formal sale agreement, the heads should state that they are not legally binding.
You may want some provisions to be legally binding – for example, before you give the buyer any information about the business, you will want the buyer to keep the information confidential and not use it to compete with the business if the sale does not proceed.
You can also ask the buyer to pay a deposit which you can keep if the buyer pulls out of the deal, and to pay your costs if this happens – the buyer’s reaction will indicate whether the buyer really intends to go ahead with the deal.
In turn, the buyer may want a period of exclusivity during which you must not negotiate to sell the business to anyone else and must pay the buyer’s costs if you do.
Whilst the heads are important, you should avoid spending too long on them – especially if they are not legally binding – as you can waste time and costs negotiating them. After the heads have been finalised, the buyer will carry out its investigation of the business and its solicitors will prepare the sale agreement (see below).
It could help your negotiating position if your solicitors draft the agreement.
Exchange and completion
When the documents have been finalised, each party will sign the sale agreement and give its signed copy to the other party (‘exchange of contracts’).
On exchange, the parties will be committed to the deal. On completion, the buyer will pay the price and you will transfer the shares or assets. Exchange and completion may be simultaneous or the buyer may want a period in between – for example, to obtain any necessary consents from customers (as you may be reluctant to tell your customers about the sale until a formal sale has been agreed).
As seller, you will also need to decide when to tell your employees about the sale – if you are selling assets, rather than shares, you have to formally consult with employees before completion, and you may not want to start this process until exchange of contracts.
The length of the process can vary considerably between transactions, but you should normally allow for at least six weeks from the signing of the heads of agreement until completion.