Selling your business can be a huge step and requires serious preparation beforehand. It is vital that you research the documents you will need and have an understanding of the sales process before it has begun.
Determine a suitable agreement structure
The first step is to decide which agreement structure is the most suitable for the transaction. The two most common structures are as follows:
- An asset sale agreement: This is appropriate for when a buyer wishes to purchase assets from a company but leave liabilities both actual and contingent behind.
- A share sale agreement: This applies when the buyer wishes to acquire shares in the target company.
Define the essential elements of the agreement
The next stage is to prepare a ‘Heads of Terms’ (HOT) document. The HOT records the essential elements of the agreement, as negotiated. HOTs are usually expressed to be ‘subject to contract’ and are not legally binding.
Verify the elements of the agreement
In order to verify the essential elements outlined in the HOT, it is vital for a ‘Due Diligence’ process to take place. The Due Diligence process is important in any corporate/commercial transaction. This often takes place at the same time as the asset/share purchase agreement is being drafted.
The Due Diligence process investigates all aspects of the sale and is used as a method of verifying that the buyer is being sold what was agreed in the HOT. The Due Diligence process should highlight any issues in the target company and/or relating to the assets, allowing the buyer to either walk away or protect themselves through the imposition of warranties and indemnities in the contract.
Disclose against any warranties
The ‘Disclosure Letter’ offers the seller the opportunity to disclose against the warranties provided which reduces the seller’s exposure to post completion damages. The seller may qualify warranties by referring/disclosing specific problems the company may have pending. If the seller does not adequately disclose, they may face an action for breach of warranty claim under the agreement.
Hand over the necessary documents
On closing the deal, the following documents will be handed over to the buyer:
- Executed share sale agreement or asset sale agreement
- Executed share transfer form (if required)
- Disclosure letter
- Resignation letters of the directors
- Statutory registers and company seal
- Release of any mandates
- Delivery of assets
What to expect from your solicitor
A solicitor is usually instructed after the heads of terms for the sale have been reduced to writing. An experienced solicitor will identify potential areas of dispute between the buyer and seller at an early stage in the transaction and will be alert to any potential future issue areas.
Any potential issues can either be legislated for in the warranties or indemnities or taken into account in the deal by way of a reduction in purchase price, if necessary. Prompt identification here is essential and will save you time and costs.
If you are considering the sale of your business, contact Ray Fitzpatrick, Partner at Augustus Cullen Law, for a no obligation consultation today.
27 February 2019