Selling your business – AN OVERVIEW

Whether selling an entire business as a going concern, disposing of a specific part or selling shares, it is vital the process runs as smoothly as possible with no surprises or enlarged tax bills, writes Michael Kinsella.

It is important to structure a sale in the most appropriate manner and to manage the negotiations professionally and efficiently in order to secure a successful sale.

Starting blocks

For the process of selling a company to run smoothly, it is essential that the process be conducted in a controlled and well-managed environment from the outset. Setting up a data room and early
notification of the proposed deal to professional advisers and banks can assist in this regard. The following preparatory steps should be considered by all prospective sellers:

Confidentiality agreement

It would be recommended to have a confidentiality agreement drafted in advance and in a form ready to be signed by all parties participating in the prospective sale as inevitably confidential and financially sensitive information will be disclosed during the negotiations.

Prior financial institution agreements

If the company has given security to a bank or other financial institution, a review of any loan agreements should be undertaken to establish whether the bank’s consent is required to the proposed
change in control of the company. It is imperative that the company’s bankers be notified of the proposed sale and of any requirements the company may have of them, in a timely manner.

Professional advice

A seller should establish a team of advisers. In addition to solicitors and accountants, the seller may need financial advisers and tax advisers. Investment advisers may be crucial in deciding how to
structure the sale process in a way that is to the seller’s benefit and to evaluate offers.

Due diligence

The due diligence process is the information-gathering exercise carried out by the buyer that allows it to find out as much as possible about the target business and establishes a complete picture of
the target’s strengths and weaknesses. It identifies any risks which the buyer may want to avoid completely and assesses the level and areas of protection needed. The process helps the buyer plan for the integration of the target into its business.

The seller should thoroughly prepare for the due diligence process s it will serve as a good basis for the seller’s disclosure letter. Good preparation will avoid any surprises during the transaction. It will increase transparency and indicate that the business is well-operated by the seller. If an information memorandum is to be presented, then thorough due diligence preparation will ensure the information memorandum does not omit any critical information.

A more common format for due diligence is a due diligence questionnaire from the buyer presenting a list of items and questions to the sellers.

Required documentation

Before a deal is negotiated, some documents might be executed, such as:

• A Heads of Agreement setting out the non-binding intentions of the parties;
• A Confidentiality Agreement;
• Stock Transfer Form – the instrument of transfer of the shares;
• Share Sale and Purchase Agreement (SPA) – the principal document which incorporates the agreement to buy and sell and the warranties to be provided;
• Disclosure Letter – this is a very important document from the seller’s perspective and should draw from the due diligence process;
• Tax Deed – a deed whereby the seller indemnifies the buyer against pre-completion tax liabilities; and,
• Other documents – examples include a transitional services agreement to assist the target’s ongoing operations without interruption.

Documents usually required in a business sale include:

• Asset Sale Agreement (ASA) – like the SPA, it is the principal document which incorporates the agreement to buy and sell and the warranties to be provided by the company selling the assets.
• Other documents – original documents transferring title to assets should also be executed.

Conclusion

The decision to sell a business is one that most people will probably only make once in a lifetime and therefore the process and execution of the transaction will require detailed and skilled planning with input from experienced professional advisers.

Michael Kinsella is a partner in the firm of Byrne Casey & Associates, Chartered Accountants and Business Advisors. He has over 20 years’ experience in providing advisory services to SME firms specialising in the area of construction and construction services. He has advised on numerous business takeovers and sales including the sale of many family companies and businesses.

This Business Support article featured in the July/August 2016 edition of The Hardware Journal.