Why you need to plan ahead when selling your business

27 September 2012
Why you need to plan ahead when selling your business

When trading gets tough, sometimes selling is the only option. Legal expert Reeta Nair outlines the key corporate and commercial issues to consider when preparing a business for sale

The Problem
I have been running a restaurant business for the past 10 years. I want to start thinking about selling it and moving on to a new venture, but I do not have the first idea how to start preparing my business for sale.

The Law
Selling your business involves various considerations of a legal and commercial nature. Certain issues need to be contemplated at the beginning of the process before detailed negotiations get underway.

The structure of the sale will be a key consideration. Not only does this have a bearing on the taxation treatment for both parties, but it can also influence the timetable and the level of complexity of sale negotiations.

Share sale
If the business is run through a limited company, the sale could be structured as a share purchase, whereby the entire issued share capital of the limited company is sold to the buyer. The legal entity carries on the business and enters into contracts necessary for the day-to-day business operations. All of the assets and liabilities of the company being sold will transfer to the buyer automatically once the ownership of the shares in the company is transferred.

Asset sale
If the assets of the business are sold, the legal entity which operates the business enters into an agreement with the buyer to sell the business assets. The purchaser can pick and choose the assets it wishes to acquire and can opt to exclude certain assets from the sale.

Expert Advice

Accounting treatment and taxation considerations will usually be the key driver behind any structure discussions, so it is sensible to ensure that tax advice is obtained at the beginning of the process. This avoids wasted time and costs which could be incurred if there is a change in structure after transaction negotiations get under way.

Check list
Preliminary considerations
A potential buyer will want to carry out detailed investigations into the affairs of the business and review its financial position and operations to ascertain whether the transaction is viable. As a seller, this will mean providing the buyer with access to documents and information on all areas of operation of the business.

Before doing so, it is advisable to ensure that the buyer signs a confidentiality agreement, agreeing to keep all information obtained in the course of such investigations confidential. This avoids a situation where a competitor could acquire key information and use it to the detriment of the seller's business operations.

A buyer may also want to negotiate a period of exclusivity, during which it has the right to exclusive sale negotiations with the seller, to which a seller would want to give careful consideration at the outset if plenty of buyers express an interest in the business once it is placed on the market.

Housekeeping
Any areas of the business operations which require "tidying up" or regularising should be attended to by a seller as part of the pre-sale planning process. For example, any key contracts relating to key assets of a business, such as a management agreement or a property lease, should be firmly in place on market standard terms without any threat of expiry or termination.

If there are contractual arrangements in place with key suppliers such as food and beverage companies, these should be on written terms which should not terminate on any change of ownership or control of the business. If there is a threat of termination of any key contracts because of a change of ownership, then the consent of contractual counterparties would need to be sought.

Consents and approvals
Any licences or approvals required for the running of the business need to be considered at the outset. If the business has an alcohol or a PPL/PRS licence, arrangements will need to be put into place for new licences to be issued to the buyer in order to ensure that the business can operate in the same manner after completion.

If the business being transferred involves a property asset which is held under a long-term lease, the consent of the landlord of the property may be required before any change in ownership can take place. These consents and approvals can take time to obtain, so timing for these should be factored into the overall transaction timetable.

Contact
Reeta Nair is a senior associate at Charles Russell LLP
reeta.nair@charlesrussell.co.uk

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