Can you do it?
Not many people sell their own business more than once. It is therefore not likely to be a situation at which you are very experienced - or expert. Professional fees however, often taken a large cut from the net proceeds, so there is some advantage in doing the work yourself. Many people decide to sell only because a buyer suggests it to them. If that happens and you are confident that the price is right, many corners can be cut. But, for now, let us suppose that is not the case.
First, lwhat are you looking to sell. Is it a business or is it a company, which owns a business? The difference may seem academic but in legal terms it is a chasm. If a company is sold, the buyer automatically gets everything that the company owns - and all its liabilities. He should have less concern about what is included in the sale, but has the additional investigative problems arising from the corporate structure. There are also several additional documents needed to record the transactions and transfer the ownership of shares, appoint directors and so on. On the other hand, if it is only the business that is being sold, then the "beans" should be counted more carefully. Net Lawman free advice on these two alternatives is contained in separate articles, the contents of which overlap. If you are selling a business, stay here and read on. If you are selling a company, click here.
Next, we will look at what work is to be done. Just as when you sell your car or your house, you will undoubtedly achieve a better price if your business is tidied up for sale. I do not mean that you should double the product range, or have some glossy sales material printed. Here are a few pointers as to what a potential buyer will be interested to note:
Organisation and methodology - if the answer to every important question is staring him in the face, he will be greatly re-assured and will have no opportunity to tell himself bad news. When the ads are placed and the phone starts to ring, you have to be ready for it.
Excellent (not just good) client or customer relations. Have all the best testimonials at hand.
Prepare a list of all the information, first that you would like to hand over on completion of the sale, and secondly, that you can show him right now - subject of course to his signing your confidentiality agreement.
Have a properly qualified firm of accountants audit your annual accounts.
Provide incentives to your staff to stay under new ownership when you sell! Casual comments about leaving may be the last thing a visitor needs to hear.
Who do you need on your sales team?
Accountants to get the books in order and advise on tax as well as advising you how to keep what you make from the sale!
Business sales agents - to find your purchaser.
Surveyors to value and advise on preparing your property for sale.
Solicitors, to sort the agreement and make it happen.
Your own staff, because if they do not approve, you will not sell!
But what do they all cost?
The team you need depends on the type of business and on your own skills and temperament. You could say that your accountants are ok, so let us tick them off. You do not need sales agents because you live in a large city where the local paper will bring plenty of interest. Only you can say whether or not you need a surveyor to check over your property. If the business cannot easily be moved, there may not be much you can do beyond having a look at the lease and checking that you have complied with all your tenant’s obligations.
What about the agreement?
The usual problem here is not that you cannot negotiate terms yourself. It is not that you do not know the deal you want. The problem is that the lawyers wrap it all up in a way that you barely understand. That age-old scenario is now over! You can buy a business sale agreement from Net Lawman and understand every term in it. Your agreement has been drafted in plain English by someone who has handled dozens of sales, many like yours, and who understands the traps and pitfalls.
Do not under-estimate the size of the task. To sell a small accountancy practice is really very simple. To sell a joinery business providing both products and services and employing ten people, becomes rather more complicated. Not more difficult; just more complicated!
Now here is what the job entails:
Put together a list of every thing of value you can see about you or find;
Add all your intellectual property, like domain names, web site, copyrights, trade marks, royalty rights
Put together a list of all the information you use or produce every day in the course of business.
Find a formula for a fair exchange of his money for your business, so that he gets the business and you get the money as simply as possible. That is the part your solicitor will do.
Finally, arrange a meeting to make it happen.
The critical issue is methodology. If you find it difficult to work on a complicated task one step at a time, this will not suit you. You have to be prepared to make notes and lists and work through them. The work is not hard - and no one in this World knows more about your business than you do. Warranties - the inside-out promises
I will now address the task itself and tell you how to make it happen. The first matter to consider is the “back-to-front” way in which lawyers pull out information from a seller. Most legal agreements consist in a number of points of agreement or obligation or rights. A business sale agreement is different. The main proposition is that everything in the business is taken to be perfect - until the seller says otherwise.
The agreement is drawn by the Buyer. That is fair because the Buyer knows nothing about the business and the Seller knows everything (we hope)! So the agreement first covers the mechanics of the deal - what is being sold, where it is, how it is to be transferred, and so on. Then it moves on to the “warranties”. The warranties are not so much the sting in the tail as half the dog. Many solicitors and entrepreneurs will deliberately insist on a seller giving warranties he obviously cannot support, and then suing for the return of much of the purchase price, a few months after the sale has been completed.
Warranties work like this: I am a seller. You produce an agreement. In that agreement, you suggest that I should warrant (promise) as facts, say 60 matters about my business. Examples might be:
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(As to the pension fund) “The assets, investments or policies held by the trustees of the Scheme are sufficient to satisfy the liabilities and obligations (both current and contingent) which the Scheme has to its members at the date of this agreement.”
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Or, “Neither the Seller nor any of its shareholders has any interest, directly or indirectly, in any company or business other than the Business which is or is likely to be or become competitive with the Business.”
Warranties and the “letter of disclosure” are handled and ultimately agreed by negotiation in advance of completion of the deal. At completion, the final version of the letter of disclosure is handed over to the lender with the other contract documents. The letter of disclosure is the other “half” of the process. In my letter of disclosure, I refer in turn to each of the warranties you have written in to the agreement. I then qualify them in the letter, so as to make them true. The most common way to do this is to say the warranty is true “to the best of my knowledge and belief”. So, my reply to the first warranty above might simply be:
“True to the best of my knowledge and belief”
In that way, before he can sue you, the buyer has to prove not merely that the warranty is breached, but that you knew it was wrong when you completed the deal. That second part is a whole lot harder than the first part. The bad news is that most agreements also contain a paragraph like: “Where any Warranty refers to the knowledge, information or belief of the Seller, he undertakes that it has made full enquiry into the subject matter of the Warranty”.
The reply to the second warranty above could also be that it was true to the best of my knowledge and belief. But let us suppose I fell out last year with my brother who promptly set up in competition with us, but who still, to my annoyance, retains a partnership share in this business. Since he is my brother I can hardly deny I know about his share in my business. However, I am rather concerned that you, my buyer, may not believe about the bad blood between us. You might assume I shall sell to you, and then continue working in the same business, with my brother. So my only option is to give you the whole story and hope it does not put you off the purchase. In other words, the effect of this system is that I am forced to give a true and complete picture.
There you have the essence of warranties and a disclosure letter. The warranties are there to elicit information that otherwise may not have been provided. Certainly, it would not have crossed my mind to tell you about my brother without that particular warranty requiring a response.
Now, finally, let us suppose the warranty had not been in the draft agreement at all. This is what would have happened: I sell to you. My dear old mum steps in and makes the peace between me and my brother and in five minutes I am in there with him, working away on all my former customers to seek their business. You are over the road struggling to make a go of my old business with far fewer customers than you thought you would buy. You asked for no warranties, so I am able to compete against you immediately.
You may find aspects of my illustration to be immoral. That may be. But I assure you that the World is full of pleasant people who would happily make money at your expense, one way or another. If everyone were fair and honest, we would not need many laws at all. Warranties - seller’s tactics
The “task” of the seller is essentially to provide full and truthful information and to avoid being tripped up in the process. The task of the buyer is to ask for the warranties, then assess the response that comes in the disclosures. Sometimes the buyer will reduce the price offered when he sees the true position. The disclosures provide a wonderful opportunity to “rationalise” a price reduction.
As a seller, you have a number of ways to deal with the sting from the warranties:
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You be the one to produce the draft agreement and remove the most “difficult” warranties before you send it to the buyer; or
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When you receive the draft agreement, you must seek the deletion of any warranties which are either outrageous or inappropriate; or
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In your draft disclosure letter, which will be sent to the buyer with your amendments to the draft agreement, should provide clear and open disclosure to the warranty statements; or
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Consider the breadth of each warranty. It may be appropriate to give a similar warranty, but worded to apply to a narrower set of circumstances; or
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Even where you “answer” the warranty in some way, there is still a strong case for qualifying absolute warranties, with words like “to the best of the sellers knowledge” or “so far as the sellers investigation has revealed”.
At all costs avoid the easy way out of leaving the warranties as they are. It is odds on that your buyer, who was so friendly at the time of the sale, will discover something he did not expect and will come back for some of his money. Warranties - buyer’s response
If you want a fair and satisfactory outcome, use warranties. The weight of advantage is very firmly with the seller. He has the knowledge. You have none. If he refuses to deal with warranties, abandon the transaction. He must be trying to hide something.
However, if your warranties are all “absolute” in matters where it is unreasonable to expect the seller to be able to give such an adamant response, it will be he, not you, who walks away from the deal. The Net Lawman warranties are tough. Our clients can easily see what is reasonable and what can be reduced. It would be far more difficult to “think up” new warranties, if the set we provided were too soft.
Set out the warranties according to the transaction. Do not include warranties that are irrelevant, such as warranties about spare parts when the business is an accountant’s practice. If your seller is not represented by a solicitor, you may have to explain the disclosure principle to him - or refer him to this page!
If the seller is represented by a solicitor, you will have to decide whether this creates an un-fair advantage. Certainly a solicitor will give you “marginally honest” information with responses like ”We have deleted a number of warranties which we trust you will agree are wholly inappropriate”. For this you should read “We have deleted all the items which might trip up our client”. You are either very robust or you have to find a tough solicitor and pay after all!
Some solicitors acting for a buyer will see the provision of warranties as an opportunity to go back to the seller later for damages for breach of warranty, possibly under the threat of complete rescission of the contract. Sellers should be aware of this since it underlines the importance not only of the contract itself, but also of the work that must be done in preparation for the sale and in connection with the letter of disclosure.
Finally, remember that any legal agreement is only as strong as the person behind it. If your seller is a limited company, you are advised to obtain guarantees. There is nothing like a personal guarantee to focus someone’s attention - ask any bank! The usual provision is for two executive director / shareholders to act as guarantors. If only one guarantor is proposed, consider insisting on a guarantee also from that person’s spouse or life partner. In the more relaxed atmosphere, which now surrounds bankruptcy, it is comparatively easy for your seller to pass his assets to his spouse and leave you with no effective cause of action against him. |
