Anatomy of a deal - The 9-step guide to selling your business part 1

Business owners spend many years and a lot of effort building their businesses to the point where they can look to sell it, building a wide range of skills and tactics to deal with issues that arise.  However, the process of buying and selling companies is often outside their experience and can seem overwhelming. In the first part of our three-part series, we'll explore the initial stages of the sale process. From engaging advisors to crafting heads of terms, we break down the critical first steps on the path to selling your business.

1. Engagement of advisors

If you are looking to sell your business, the first step in the process should be to appoint a corporate finance advisor. These specialists can help you understand the likely value of your business, organise a marketing process and negotiate initial commercial terms including price structures. We at Kingsley Napley do not perform this role, but we have many contacts who can assist.

Appoint solicitors once you have identified a buyer or earlier if there is to be an auction process or if changes need to be made to tidy up the company – for example, by removing investment or personal assets – before the sale. We will assist with the rest of the process. 

Our corporate lawyers will lead our team, bringing in other specialists, such as those in commercial law, employment law, property law, and tax law, where appropriate, to ensure we properly and promptly deal with all legal aspects of the sale.

Finally, you will also want to appoint accountants to help you with the financial and tax due diligence. This might be your existing accountants, or specialists who work with your corporate finance team. 

When choosing your advisory team, it's vital to ensure that you feel comfortable working with them, that they have substantial deal experience, can deliver the service levels you expect, and that you can collaborate effectively with them, especially in stressful situations. 

Opting solely for the lowest price can often result in inadequate service, leading to delays in the sales process and, in some cases, even jeopardising the sale altogether. Remember, in all aspects of business, you generally get what you pay for, and choosing a team based solely on cost estimates can bring significant risks.

2.  Heads of terms

When you have found a buyer for your company, it is a good idea to document the main terms of this agreement (such as the headline price and how it will be calculated and paid) in a document called the "heads of terms" (also referred to as a letter of intent or term sheet).  

Generally, the only parts of the heads of terms that are stated to be legally binding are:

• The confidentiality clause to ensure the parties keep the deal confidential and the buyer does not make public any of the information disclosed by you during due diligence. 
• The exclusivity clause, which prevents you from negotiating the sale of your shares with anyone other than the potential buyer. 
• The costs clause, which obliges each of the parties to pay their own costs regardless of whether the deal is completed.

It is worth noting that your heads of terms won't necessarily include the first two of these, however, as they may have been dealt with in separate documents earlier on.

As the remaining clauses of the heads of terms, such as those around price, are not usually legally binding the parties can change their arrangements as they negotiate binding documents. However, they have moral force, making them a useful negotiating tool if your buyer tries to change the deal without good reason later on. Of course, this cuts both ways – which is why we must review and advise on the heads of terms before you sign them. That way, we can ensure that the main commercial terms are included and that you are adequately protected – or at least that you know what you are getting into.

Preparing the heads of terms allows potential misunderstandings or commercial differences between you and your buyer to be flushed out and dealt with at an early stage. This allows for a quicker and more efficient process later on, and while the parties sometimes want to jump straight to detailed documents, we generally recommend that heads of terms are entered into.

3. Due diligence

It is your buyer's responsibility to ensure it understands your company and what it is buying, as the law does not offer much protection to a buyer once the deal is complete. Consequently, your buyer will seek information about the shares and the company before signing any binding contracts. This process is known as "due diligence" or "DD" and there are a number of different limbs to it. These include legal, due diligence, which we will help you with; accounting and tax due diligence, which the accountants assist with; commercial due diligence, often done directly between you and your buyer; and regulatory due diligence if you are operating in a regulated sector, which appropriate compliance consultants usually handle.

The process for this is that your buyer's advisors will send their counterparts acting for you a due diligence questionnaire containing a range of questions, and asking for documentary evidence to be provided to support your answers. For legal due diligence this will be your buyer's solicitors reaching out to us with a wide range of questions covering things such as ownership of the shares in the company, its constitution, key contracts, financing and security arrangements, real estate matters (there are often separate questionnaires for this), employee issues, IT and data protection and litigation. Your responses will be provided by a combination of written answers to the questions and provision of connected documents via a virtual data room, which we can set up for you.  

There will, inevitably, be more than one round of due diligence questions so this is quite a time-consuming process for all concerned. 

To ease the burden of this, for legal DD we will usually go through your first-draft replies to ensure you have responded to the questionnaire fully, that the documents are complete and support the answers provided, make sure documents uploaded to the data room are clearly named so people can easily determine what they are and to pre-empt further enquiries where possible.  

Sometimes, sellers want to manage the DD process without our involvement to save costs, which can work well for experienced sellers or those with internal legal teams. However, in our experience where those circumstances don't apply, trying to deal with the process yourself can slow the transaction significantly and create frustration on both sides as your buyer tries to understand your replies and you receive questions you think you have already answered.  

Stay tuned for Part 2, where we'll delve into the complexities of transaction documents, disclosure, and ancillary documents.

If you are considering selling your company, we’d be delighted to help you through the process.  Please contact John Young or Krystina Tang.