Guide To Selling A Business
A comprehensive guide for business owners to understand how to sell their companies
Making the decision to sell your business is a difficult one, so it's important to get the sale process right - not only to maximise value, but also to secure the future of the business.
This guide aims to provide an overview of the key steps and processes which are required as part of the sale process. The sale process itself is complex, requiring technical advice and input from a range of different areas and specialists. Each deal will have its own individual issues and nuances, so I would therefore strongly advise the use of experienced professionals to ensure that you achieve the optimum outcome for yourself and your business
I hope you find the guide useful, but if you have any queries, or would like to discuss how Eclipse can help you either now or in the future, please don't hesitate in getting in touch.
Preparing For Sale
When selling a company, effective preparation is vital in maximising offers and protecting value
Effective preparation of financial information is vital in order to maximise value in any process.
Key information will include:
Presentation of the "underlying earnings" of the business
Monthly management accounts for the last three years
Balance sheet line item breakdowns for the most recent year end (debtors/creditors etc.)
Reconciliations between management accounts and statutory accounts
Historic corporation tax computations, VAT returns and other tax documentation
Collating key legal documents will highlight any potential issues and allow these to be dealt with in advance of commencing a process.
Key information will include:
Corporate documents (shareholders' agreement etc.)
Employee salary details and contracts
Property information and valuations
Health and safety information
Insurance policy details and claims history
Details of any ongoing litigation/disputes
Creation of a virtual dataroom is essential as part of any sale process, allowing due diligence to be performed efficiently.
Datarooms contain all key legal and financial data (outlined to the left) in an online platform which allows buyers and their advisors to access them easily.
Reputable providers include the following:
A number of law firms also offer their own dataroom platforms.
Creating an effective sale document (information memorandum) not only helps to drive higher offers, it also protects value by ensuring that these offers are made by well informed buyers.
These documents vary in length dependent upon the size and nature of a transaction, but generally contain the following key sections:
Customers & routes to market
Management & employees
An overview of the key steps from identifying buyers to receiving offers
Identifying And Assessing Buyers
Equally as important as effective internal preparation is buyer research. Identifying the best strategic buyer or financial investor for a business is essential in maximising value.
Using an advisor in this respect provides a significant advantage for selling shareholders. Eclipse utilises detailed sector knowledge and proprietary databases to identify the most likely strategic buyers which, combined with the client's own input, delivers a shortlist of parties to contact.
Furthermore, Eclipse has the ability to contact buyers and understand their acquisition criteria prior to sharing any information. This is vital in protecting confidentiality (see below).
Allowing a sale process to leak can be damaging to a business both internally (creating a negative atmosphere amongst employees) and externally (creating issues with customers and suppliers).
In order to protect confidentiality, a Non-Disclosure Agreement ("NDA") should be signed by prospective buyers before any information is shared.
By utilising an advisor, sellers can remove themselves from direct dialogue with buyers, allowing initial conversations to be held on a "no-names" basis and thereby significantly reducing the risk of a process being leaked.
Once NDAs are in place, information sharing can commence with prospective buyers. Initially, information is generally shared in the form of the information memorandum. Prior to requesting offers, it is often wise to offer buyers a Q&A call in order to clarify any initial queries that they have.
Where the management team will continue to play a key role in the business going forward, it may also be appropriate to hold management presentations with a small number of buyers. This will further enhance their knowledge of the business and individuals involved, ensuring that offers are well informed and deliverable.
When asking prospective buyers to make an offer for the business, it is important to articulate exactly what you would like these offers to contain. This is generally done through a "process letter" which outlines the desired content of any offer. Typical requests include:
Price and consideration structure
How the transaction will be funded
Assumptions made in arriving at the offer
Due diligence requirements and advisor details
Timetable to completion
Understanding the terminology used in offer letters will allow you to assess the true value of offers
The vast majority of offers are made on the basis of being "cash free, debt free". In simple terms, this means that any cash in the business is retained by the seller and that all debt is repaid by the seller upon completion.
Transactions should also include an adjustment to "normalise" working capital. This prevents the buyer from having to inject funds into the business if there is insufficient working capital to run the business after completion.
This adjustment is usually calculated by comparing the working capital at completion against the average working capital over the recent past.
Consideration can generally be separated into three distinct categories:
1. Day one: funds which will be paid to the seller at completion.
2. Deferred consideration: funds which will be paid to the seller at a defined date in the future with no conditions attached.
3. Earnout: also known as contingent consideration, these are funds which only become payable in the future if certain conditions are met (e.g. the business achieves a certain level of profits in future years).
Most offers will require the seller to grant the prospective acquirer a period of exclusivity within which to complete the transaction. During this period, the seller will be prohibited from speaking to other buyers about a potential sale of the business.
Whilst these periods vary depending upon the nature of the transaction, they normally range between six and eight weeks.
It is important to drive a defined timetable during this period of exclusivity to avoid the loss of momentum and ensure an efficient completion.
Heads of Terms
Heads of terms are highly effective in protecting value and managing process timetables
After analysing the offers received, the next step is to select the preferred bidder and move forward with them. At Eclipse, we have a strong preference for agreeing detailed Heads of Terms with the buyer at this stage.
Heads of Terms set out the key deal parameters which have been agreed between the parties. Whilst not legally binding, they help to provide clarity on all key issues early in the process and are an excellent way of protecting value for the seller.
Key areas which are normally included within Heads of Terms are as follows:
The headline price and timing of payments (day one vs deferred vs earnout);
Definitions of items which will be treated as debt and deducted from the price;
A defined method for calculating the working capital adjustment;
Due diligence requirements for the buyer (see next page);
A legally binding section of the document which reconfirms confidentiality and outlines the period of exclusivity and terms of this;
Details of the level of warranties which are expected to be provided by the sellers (see section 7 for further details);
Confirmation that a Warranty & Indemnity insurance policy will be utilised (if applicable).
The document will commonly also have a detailed weekly timetable appended to it, which sets out the key actions required each week to achieve the desired completion date.
Due diligence is a time intensive process, analysing all key areas of your business
Once Heads of Terms have been signed and the exclusivity period has commenced, the due diligence process will start immediately.
Buyers will generally look to complete diligence in the following core areas:
Legal (including corporate, property, HR, health & safety etc.)
The diligence process will also likely involve a site visit from the buyer's management team in order to assess the operations/property.
The work will be performed by a combination of external advisors (such as law and accountancy firms), in addition to internal teams from the buyer.
Preparation is key, and a well populated dataroom will allow the process to be completed in four to six weeks, however this can be significantly more drawn out if inadequate preparatory work is undertaken.
It is important to note that due diligence is time intensive and it is therefore important to think about which team members will be made aware of the sale process in order to provide support during this period.
The legal process is centred around negotiation of the Sale and Purchase Agreement
Once the diligence workstream is well progressed, work will begin on the key legal elements of the process.
This is primarily driven by the creation of a Sale and Purchase Agreement ("SPA") which is the binding legal document that governs the terms of the transaction.
In addition to setting out the key legal elements of the deal, the SPA will also contain a set of warranties. In short, warranties are statements provided by the seller relating to the target company and its business. If a warranty is subsequently proven to be untrue and the value of the company is reduced, the buyer may be able to claim for a breach of warranty and seek compensation for this.
In order to protect the seller, a separate document called the Disclosure Letter is prepared in conjunction with the seller's lawyers. This letter highlights all areas where the warranties contained within the SPA are not entirely true, and prevents the buyer from subsequently claiming breach of warranty for these facts.
Where a more specific issue has been highlighted during the diligence process, the buyer is likely to seek an indemnity. By providing an indemnity, the seller promises to reimburse the buyer on a pound for pound basis for the indemnified liability.
Completion of the transaction involves signing of the legal documentation and the flow of funds
Upon agreement of the SPA, signing has traditionally taken place in the legal advisor's offices, however completions are increasingly being performed remotely.
The final step is to ensure that all parties receive the relevant funds. Preparation of a detailed funds flow is therefore a key step in ensuring that completion goes smoothly.
This will involve ensuring that all funds are in place for the purchaser (whether this be existing cash or the use of third party debt) and that these are then safely transferred to the seller and any other relevant parties (such as the repayment of bank loans).
In order to simplify this process, funds are usually held in the legal advisor's client accounts and transferred from there in order to avoid any costly errors.
DISCLAIMER: This page and the broader "Guide to Selling a Business" have been prepared only as a guide. No responsibility can be accepted by Eclipse Corporate Finance Limited for loss occasioned to any person acting or refraining from acting as a result of any material in this guide.