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The process for selling your business

By Tim Scanlan / 05 June 2020
4 min.
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Worthwhile read for: Business Owners

We are often asked what the likely process is when someone is selling their business. In this article, Partner, Tim Scanlan discusses the most common way a sale process occurs.

Initial stages and confidentiality 

A proposed buyer will require some initial information about your business in order to assess any offer they propose to make. 

Providing commercial information to another party is always a risk. To assist in mitigating this risk, it is recommended that a confidentiality deed is entered prior to any information being provided. 

Despite the protections of a confidentiality deed, in some circumstances there is a higher risk to the seller in providing commercial information – this is the case, for example, where the proposed buyer is a competitor or has the capability to start a business that is the same as your business. Where this is the case, you should take some practical steps to protect yourself. An example of this is limiting the sensitive information provided to the proposed buyer until such time as the buyer has a clear intention of proceeding with the transaction. The proposed buyer could be provided with more general information initially and then the more sensitive information after the proposed buyer has indicated that it is satisfied with the initial information provided. 

Initial offer

If the proposed buyer is satisfied with the initial information provided, the proposed buyer may provide a non-binding indicative offer to you for consideration. 

At this stage you will be able to assess if the offer is something that you are willing to entertain or whether the process with the proposed buyer should cease. If you wish to progress, the key terms of the proposed transaction should be agreed between the parties. 

The terms of the transaction can significantly impact the result for either party. For example, if you were wanting to proceed by way of a sale of the shares of the company that operates the business then this would be a materially different structure to that of an asset sale to the buyer. We can discuss the different transaction structures further but if the parties are to have different views as to the structure of the transaction then it is important to gain an understanding of these differences as early as possible because, if they cannot be overcome, then the transaction may not proceed. 

It is also a good idea to agree any indicative timetable for the transaction to set the expectations of the parties for the progress of the matter. 

Once the parties have agreed the key terms, it is a good idea to execute a short document containing those terms in order to confirm that the parties are on the same page. The terms of this short document are likely not to be detailed enough to bind the parties and ensuring the document is non-binding also avoids creating any tax consequences for the parties.

Formal documentation

Based on the short document agreed between the parties, the parties then can commence the drafting of the formal sale agreement. 

You can expect some negotiation in relation to the terms of the formal sale agreement. However, if the formal sale agreement generally reflects the short document agreed between the parties, the parties will be well progressed to finalising the document. 

The formal sale agreement will contain provisions relating to the conditions that must be satisfied prior to completion, the steps the parties must take prior to completion occurring, the obligations of the parties on completion and any post-completion requirements for each of the parties. 

Once the formal sale agreement is agreed and executed, the parties then can move to finalise the sale. 

Finalisation of the sale 

The formal sale agreement will provide the steps necessary to finalise the sale. This will often require some conditions to be met such as the consent of the landlord to the assignment of lease, the consent to key customers or suppliers in relation to the assignment of the customer agreements or supplier agreements and the grant or transfer of any licences necessary to operate the business. The process of notifying third parties should not occur before you have binding arrangements with the proposed buyer. 

Once the conditions have been met there is ordinarily a short period of time where the formal sale agreement is unconditional so that the parties can finalise the items necessary for completion to occur. Completion will then occur when you provide all items as required by the formal sale agreement which are necessary for the buyer to continue operation of the business in exchange for the purchase price. 

Next steps

If you are considering selling your business, contact a member of our Private Enterprise team.

05 June 2020
Authors
Tim Scanlan
Partner
Tim is a Partner in our Private Enterprise practice and specialises in private client mergers and acquisitions.

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