October 9, 2019
Selling Your Business – Are You Ready For The Legals?
By James Ellis-Rees of Faegre Baker Daniels LLP
A great deal of preparation goes into selling a business so when the stars finally align and you and your buyer are ready to do the deal you will want the legal transaction to go as smoothly as possible. There is a lot you can do ahead of time to avoid bumps in the road and here we look at some of the issues which you can anticipate. Good preparation will help avoid the uncertainty and heartache of an inefficient legal process, and could even make the difference between the sale going through and a painful collapse.
Fixed price or adjusted price? A price adjustment could be attractive if there is the potential for you to realise more than with a fixed price but the adjustment mechanism would need careful thought.
An earn-out is not uncommon and has the attraction of increasing your upside if the business delivers a good performance. One concern with earn-outs is whether the buyer might constrain the business’s ability to deliver during the earn-out period. There can be a lot of negotiation around the details of these mechanisms but this needn’t be a problem if the principles are agreed at an early stage.
Are you going to receive cash, loan notes or shares? This will naturally be a significant issue for you and driven to a large extent by your tax position. Loan notes or shares will involve extra transaction documentation, although it needn’t be problematic if the consideration structure is agreed upfront rather than being left until the deal gets underway.
Full payment on completion would be ideal but you should think about whether you can live with deferred payments or an escrow arrangement as these are often required by buyers to give them security in the event of a warranty claim emerging. If you are not prepared to go along with some form of retention this may come at the cost of a lower overall price.
Retention terms can be complex and time-consuming to agree, and if an escrow is used an allowance will need to be made for bringing an escrow agent on board and negotiating the escrow terms. If an escrow is agreed at the outset the details can be comfortably managed as part of the process, but if it is only brought up part of the way through the transaction there are likely to be hold-ups.
Warranty and Indemnity Liability
You will need to consider your attitude to potential liability under the warranties and indemnities that you will invariably have to give. They will leave you exposed to risk for a period after the deal is done and you will want to minimise that risk by ensuring there are as few potential issues as possible in the business and also by negotiating reasonable liability caps and claims periods with the buyer.
However successful you are in doing this, some level of risk will remain and buyers sometimes take an aggressive approach to pursuing warranty and indemnity claims.
You could be sanguine about this possibility but it might also be worth building warranty and indemnity insurance into the deal. This insurance is usually written to cover the buyer but is often agreed to by both parties as it can benefit both sides. For you the advantages are that it can give you a clean exit by eliminating the need for an escrow and also enhancing the valuation by strengthening the warranty package for the buyer. The decision to take this insurance should be made early on to allow time for the underwriters to give an initial indication of cover and then review the documentation during negotiations before providing their final terms.
Consents and Approvals
You should consider early on whether you will need consents or approvals for the sale from any third parties as these can take some time to obtain. If you need approvals from regulators or the competition authorities you will know these are significant exercises and will no doubt have already built them into your planning.
More commonly, you should think about your major customers or suppliers. There may be assignment or change of control provisions in your contracts with them but, even if there aren’t, you may well need to talk to them to keep them on board.
If you are selling the business rather than the company you will need consents from your landlords to assign your leases and this often takes many weeks. Consents from lenders and leasing companies can also take some time to obtain.
Realistic timescales for all this should be built into the transaction timeline to avoid you coming under pressure as you near completion.
Be prepared for the due diligence process to take up significant management attention, particularly at the start when the bulk of the information needs to be assembled and replies given to the buyer’s initial round of information requests. You should however use as small a team as you can to preserve confidentiality and minimise disruption to the business.
It is well worth investing the effort of making a thorough job of the due diligence at the outset as it can smooth the progress of the deal by building the buyer’s confidence.
You should decide where to draw the line about providing some types of information. For example, granular information about margins earned by individual divisions or product lines or from individual customers may well be too commercially sensitive to disclose until later in the transaction process. Personal data about employees should also not be disclosed, although a lot of staffing information can be provided without identifying individuals. If the buyer is a competitor you should be particularly careful in case the transaction does not go through.
If there is a particularly significant matter to disclose, for example a sizeable dispute or an investigation, you should consider discussing it with the buyer rather than just leaving it for them to spot in amongst the rest of the due diligence information.
You should give some thought early on about how and when to inform your employees about the sale. Too soon or too late will both risk disruption, as will giving too much or too little information.
If you are selling the business rather than the company, you will have obligations under the transfer regulations (TUPE) to inform or consult with the employees within a particular timeframe about the transfer of their employment to the new owners.
For a share sale the TUPE rules do not apply, but timing announcements about the deal will nonetheless be a sensitive matter. If left too late, the rumour mill can be disruptive and could force your hand for you.
The sale agreement, whether for a share or asset sale, will usually be a substantial document often requiring a great deal of negotiation. Depending on the price structure, consideration and payment terms, there can be complex mechanics which need careful attention. Your obligations under the warranties and indemnities will often be a focus for extensive negotiation. Post-completion non-compete restrictions are usually expected and may also be a significant area of negotiation if you are continuing in business after the sale.
The legal transaction for a business sale will often proceed fairly smoothly with seller and buyer and their legal teams sharing a willingness to get the deal done. The chances of your sale working out like this will be all the greater if you have given some thought beforehand to the issues we have outlined. Even so, sometimes even the worst-prepared deals still manage to struggle across the winning line, although in our experience it is well worth avoiding the heartache!
This document is for information purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.
James Ellis-Rees (Associate) Faegre Baker Daniels LLP 7 Pilgrim Street London, EC4V 6LB Email: james.ellisrees@FaegreBD.com Tel: +44(0)2074504528
“We were delighted with the services that Bluebox offered us. Bluebox’s attention to detail through their Diamond Programme ensured that we were well prepared for when the business was taken to market and that the sale process itself was managed expertly.
We challenged Bluebox with finding the right strategic buyer and thereafter negotiating a deal that met our requirements. In helping initially to identify and to secure the deal with Mountville Mills they accomplished just that. Communication throughout was excellent and professional, managing each stage of the process. I would have no hesitation in recommending Bluebox to any corporate shareholder or private business owner looking to divest their business.”
Richard Millward, Former Client
“We were delighted with the services that Bluebox offered us. Bluebox were challenged with finding us the right strategic investor and, thereafter, negotiating a deal that met our complex requirements. In identifying and securing the deal with LGC they have done exactly that. The process itself was efficient and smooth, largely due to the excellent communication from the Bluebox team, who also demonstrated excellent experience at managing a very engaging auction process. I would be delighted to recommend Bluebox to any corporate shareholder or private business owner looking to divest a business.”
Helen Dickinson, Former Client
It has been a real privilege working with the team at Bluebox over this last year or so. Bluebox’s attention to detail ensured that we were well prepared for when the business was taken to market and the sale process itself was managed expertly. Starting the process, I had no idea exactly what this would entail and the volume of work that has been produced by everyone and the result reached today is nothing short of brilliant.
Hugh Morris, Former Client
We are delighted with the services that Bluebox was able to offer. They showed an intimate knowledge of a deal cycle, managed a tight auction process and were highly communicative from the start. I would happily recommend Paul and his team to business owners contemplating a sale of their business in the next 24 months. Experience is key and this has paid off for us.
Laurence Seward, Former Client
Aligning ourselves early with Bluebox, and entrusting the team to guide us through their process proved to be a highly rewarding investment from all viewpoints. Bluebox’s support significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years. The earlier the engagement the better so far as I am concerned.
Mike Minett, Former Client
We began working with Bluebox in early 2015 through their Blue Diamond Programme, as we were contemplating an exit. We found that the process focussed our minds on the key areas of growth in the business, and prepared us well for the inevitable rigours of due diligence. During the sale process itself, the advice offered by the Bluebox team was invaluable. We found them to be helpful, straightforward and honest.
David Stokes, Former Client
When selecting our adviser, it was extremely important that they had access to international buyers and were experienced in cross-border M&A. The team at Bluebox proved to be invaluable by identifying a strategic acquirer from America who was not known to us and by negotiating an excellent deal for all parties. I was also impressed with the process management from Bluebox, which ensured that the deal was closed in a timely fashion.
Jeff Weinstein, Former Client
When I first engaged with Bluebox, I was hesitant as to the benefits of using an advisor to firstly, find a buyer for my business and secondly, to get a deal over the line. However, now that the deal has completed with KPM, I can honestly say that the finer negotiation points handled by Bluebox and their overall management of this process has been nothing short of first class. I would be delighted to recommend Bluebox’s services to any entrepreneur contemplating the sale of their business.
Bill Ballard, Former Client
Bluebox worked closely with us over the following six months and helped us to implement some key initiatives which made InferMed a more attractive acquisition target. Once we decided to sell the business, the Bluebox team were very diligent in ensuring that no stone was left unturned. They negotiated expertly on our behalf to ensure we got the best deal possible.
Alan Montgomery, Former Client
The pre-sale planning programme that we signed up for with Bluebox made us develop our strategies and focus on the bigger picture. It proved to be a very rewarding investment from all viewpoints and significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years.
Nigel Parsons, Former Client
I have experienced first hand the value that can be created through highly structured pre-sale planning. It amazes me that it is not something that everyone does. It is so disappointing to see around 90% of transactions collapse before they complete and pre-sale planning will not only enhance your price, but also significantly enhance your chance of a closed deal.
James Caan, Investor
We worked incredibly closely with our advisers who provided expert knowledge of the sale process with which we were not familiar. We were truly delighted with the results.
Marten Nielson, Former Client
We appointed advisers to manage the sales process after we had received a number of unsolicited approaches for the business. I was incredibly impressed by the immense value that could be created by expertly negotiating with a group of already interested parties.
Paul Duckworth, Former Client
I was delighted with the service that the team offered and their real attention to detail. The deal was not without its complexities and it was reassuring to have such experienced advisers assisting me throughout the negotiations.
Peter Bennett, Former Client
Truly delighted with the way my sale process was managed. The fact that the team I worked with achieved such a great multiple is testament to their experience and their ability to create some true competitive tension.
James Averdieck, Gü, Former Client
The team at Bluebox provided invaluable support in negotiating this complex transaction. Their access to international purchasers, and exceptional knowledge of cross border M&A ensured that the deal was concluded efficiently, achieving a highly successful outcome for us all.
Jon Parslow, Former Client
“We selected Bluebox after a fairly long round of evaluating potential advisors because of their scientific, yet challenging approach to maximising value. During our initial meetings they showed us how far short of “ready” we were and consequently we completed more preparation in the early stages which meant we were equipped for what was to come. We were delighted with our choice of Corporate Finance partner. I do not hesitate in recommending Bluebox for any SME to consider.”
Simon English, Former Client
Bluebox provided invaluable advice in managing the negotiations with incoming investors. Their skills in handling these discussions were evident from the outset and the vital interface that they provided between the incumbent team and the incoming investors was truly beneficial.
Henry Braham, Former Client
Bluebox have a professional, dynamic and experienced team that is greatly assisting me with my focus on my exit within the next 24 months. Their structured approach is very refreshing and their ‘Blue Diamond’ programme is adding immense value.
Matt Evans, Former Client
The team at Bluebox provided me with a seamless service from the start of the engagement until our deal was completed. Attention to detail was commendable and their understanding of corporate M&A very impressive. I could not recommend them highly enough.
Victor Lewis, Former client
Having tried to sell my business previously – and failed – I was only too aware of the importance of pre-sale planning. This is a talented team offering a service that most people find out about, but too late.
Simon Hulme, Former Client
Bluebox are a quality outfit. Their access to International acquirers and relationships with the highest quality domestic investors was impressive. My shareholders and I received excellent service from start to finish and it was refreshing to be dealing with a senior team throughout the sale exercise.
Michael Clapper, Former Client
I cannot recommend the team at Bluebox highly enough. Their expert guidance throughout the entire sale exercise resulted in my shareholders securing an excellent deal with which the entire team was delighted.
Mark Rodol, Former Client
I’m really pleased with the service Bluebox provided. The team demonstrated excellent knowledge of the process to follow and led negotiations for the hospital in a way that allowed us to ensure we received appropriate value whilst focusing on reputational risk. Communication and service were of a very high standard.
Steven Davies, Former Client
With Bluebox’s expert advice we were able to find the right buyer that will benefit our business strategically. We’re delighted with the outcome and look forward to starting our new chapter
Clive Hillier, Former Client
The advice offered by the Bluebox team throughout the process was invaluable to the shareholders. We strongly believe that participating in Bluebox’s pre-sale planning programme was a significant driver behind the success of the deal. Their project management and negotiation skills throughout the sale process itself resulted in an exceptional deal being delivered to all parties involved.
Harpal Singh, Former Client