Legal guide to preparing a business for sale in the UK

Thinking of selling your company? Whether you're a business owner or a director tasked with preparing a company for an exit, navigating the sale of a company can be complex and time-consuming. From due diligence and valuation, to negotiating the sale agreement, there are many legal and practical steps involved.

This bite-sized guide breaks down the key stages of the process, helping you understand what to expect and how to prepare - so you can approach the sale with confidence and clarity.

Preparing your business for sale

A company sale will usually follow a specific set of steps, so it will be helpful for you to understand this process before entering into it.

Firstly, the heads of terms will be agreed. These will usually include the key terms of the company sale, such as price, payment mechanism and exclusivity – meaning the seller agrees not to negotiate with anyone else during a specified period of time.

Next, the financial and legal due diligence process will occur. This means that the buyer’s accountants and solicitors and will ask a lot of questions about the company and will review company’s finances, tax, contracts, employees, property and compliance so that they can understand the company. This will allow them to flag to the buyer any areas of concern. The seller should require the buyer to enter into a confidentiality agreement agreeing not to use any of the information provided to them except for determining whether to proceed with the transaction.

Usually, the drafting of the share purchase agreement will occur next. This agreement will include warranty statements that the seller will either confirm to be true to the buyer or will disclose against to clarify in any way they are untrue. For example, the warranty might be that there are no disputes. If the company is in fact subject to a claim from a customer or employee, then the seller would need to provide details of this.

The seller completes the disclosure process by going through the warranties provided in the share purchase agreement and setting out any disclosures in a disclosure letter. There is often an element of duplication between responding to the due diligence questions and drafting the disclosure letter.

Once the documents are agreed and both parties are happy to proceed with the sale on the terms that have been agreed, then the transaction will proceed to completion.

Business value and purchase price

Your accountants or specialist corporate finance advisers are normally in the best position to advise you on the value of your company and the negotiation of the purchase price.

The seller would usually want to receive all of the purchase price in cash on completion. However, if the company is going through a period of growth, you may benefit from some of the consideration being an “earn-out”.  This means that part of the purchase price will depend on future performance of the company.

The purchase price normally includes the surplus cash in the business which is calculated through completion accounts prepared after completion. This allows the seller to get the benefit of any cash which has been left in the company which is in excess of the amount required for normal working capital.

Seeking tax advice

It is important to seek tax advice as early as possible so that you can structure your ownership in the most tax efficient manner. For example, you may want to insert a new holding company on top of the trading company, so that you can retain the sale proceeds in the holding company. Alternatively, you may want to transfer some shares to family members to benefit from more than one seller’s business asset disposal relief (provided they meet the employment and ownership criteria).

Corporate to-do list

In our experience, a company’s failure to have properly maintained its statutory register of shareholders often causes difficulties and potential delays to completion. The register of shareholders is the critical document evidencing the sellers’ title to their shares and so a buyer understandably wants to ensure that it is up to date and properly records the shareholder history.

If the shareholder register cannot be found, it is possible to reconstitute the shareholder register, but only if all the relevant stamped stock transfer forms can be found or evidenced. We would therefore recommend that you ask your lawyers to confirm that all is in order at an early stage to allow time to address any issues and present acceptable records to the buyer.

What happens to your employees when you sell your business?

As part of the due diligence process, the buyer will want to see information about the employees of the company. This may include the nature of their employment with the company, their contract details and any benefits the employees receive. It is helpful to prepare for sale by putting together a list of your employees, including their key details such as working hours, dates of birth and length of service. You should also ensure that you have full details of your pension scheme and signed and dated copies of all employment contracts.

You should also review your privacy notices (including any employee specific privacy notice) so that employees and other data subject are on notice that you may share their information with a prospective purchaser.

Preparing your key contracts

A buyer will want to understand the full scope of your contractual arrangements with customers and suppliers. The review of these contracts will form a substantial part of the commercial due diligence conducted by the buyer. Ideally these contracts will be in a signed format, or alternatively, some suppliers will provide you with invoices and conduct business using their terms and conditions.

If there are contracts which you cannot locate or access, you may need to request a copy from the other party to the contract. This can cause delays, which is why we recommend reviewing this information at the earliest possible point.

Some contracts will include a change of control clause, allowing the other party to the contract to terminate the contract if the company is sold. Therefore, you will want to consider your strategy for gaining their consent for the company sale prior to the sale completing, especially if the contract forms a significant percentage (of the turnover for the company.

Property considerations when selling your business

If the company holds a leasehold property, then that is likely to simply transfer with the company and the buyer will want to make sure it understand the rights and liabilities relating to that property. The buyer may be particularly keen to understand any liability for dilapidations on expiry of the lease and want that factored into the purchase price.

If the company, seller or a SIPP owns a freehold property occupied by the company, then you need to consider what arrangements will need to be put in place for the occupation of the property after completion. If there is any desire to move a property to a different group company or outside the group, it is important to take tax advice. There may be scope for more tax planning before a purchaser has been identified.

Bringing the information together

As the seller, you will be required to provide key information to the buyer as part of the due diligence process. This information is most likely to be provided through an online shared folder, which is known as the “data room”. It is helpful for you to therefore ensure that all key documents, contracts and corporate information is well organised and ideally stored electronically.

The corporate and commercial team at Hughes Paddison solicitors have a wealth of expertise and experience in assisting clients with the sale and purchase of their companies. Whether you own a small family-run business, high growth start-up or well-established larger corporate enterprise, we can provide high-quality legal services to help you achieve the best outcome. If you are considering selling your company or have already started the process, please get in contact with one of the team to see how we can help you.