We all know about and are familiar with the importance of advice from accountants in the context of business sales. They can advise to ensure that the transaction is put together in a tax efficient way – that maximum use is made of the various reliefs available (including, in particular, entrepreneur’s relief). This will have a significant impact on the amount of cash which ends up in the seller’s pocket at the end of the transaction.
More recently other, slightly more shadowy figures have come to the fore in the field of business sales: commercial agents, also referred to as “business transfer agents” and/or “business brokers.” These are business match-makers, seeking to introduce a willing seller to a willing buyer and agree an appropriate price.
At that stage then, with the structure of the transaction pretty much determined by the accountant and with the price “agreed” through the commercial agent, what is the role of solicitors in the process? How can the apparent expense of involving solicitors end up saving significant amounts of money (and time)?
I can summarise the need for a solicitor in three easy points:
- To be sure you know what you are selling;
- To know the questions the buyer will ask and deal with issues before they are raised by the buyer thereby reducing the risk of “chipping” (the gradual reduction of the headline sale price by pointing out issues with the business being purchased); and
- To ensure you are dealing with the buyer on an equal footing.
Looking at each in turn:
Know what you are selling
I have already summarised elsewhere the difference between the sale of a business and its assets and a sale of shares (see my video on why a box of chocolates can be your best friend in understanding business sales). It is important however that this is clearly understood by both seller and buyer.
As a general proposition sellers will want to sell shares (to make use of entrepreneur’s relief), buyers will want to buy a business and assets (because of concerns over liabilities and problems lurking in the background which will pass on to them – or, more correctly, stay with the company – if they buy the shares).
Various more complex transaction structures can be devised to try to resolve this conflict – hive ups, hive downs etc. Complexities can also arise when a seller wants only to sell part of a business.
Fundamentally, however, the seller needs to ensure that they have correctly understood and communicated to the buyer what they are agreeing to sell.
I have been involved in transactions which have started out with the seller convinced they have agreed a sale of the shares of their business which have turned out to be sales of business and assets. Similarly I have been involved in transactions which have gone the other way.
It is important to discuss what is planned with a competent legal adviser as early as possible in the process to ensure that both the buyer and seller are clear from the outset (and agree) what is planned. This will avoid wasted time and money.
Knowing the Questions the Buyer is Likely to Ask (and the Issues that Will Come Up)
There is a fairly standard list of questions which a buyer should ask before buying any business. In legal jargon these are referred to as “due diligence” but, in the end, they are largely just common sense.
They cover, for example, details of employees and important customers. They also extend however to pension arrangements, health and safety training and tax.
The list is slightly longer for a share sale but even on a sale of business and assets many liabilities will pass to the buyer and many of the same questions need to be asked. It is important that the seller is able to provide satisfactory answers to all of the questions and support the answers with documentary evidence.
If they cannot do this, the buyer is likely to either ask for an indemnity to cover any losses which arise should things turn out to be as bad as they have not been proven not to be or a reduction in purchase price (“chipping”).
Issues frequently arise in relation to:
- Leases – is the Lease actually to the business or is it to the owner? If there is to be an assignment then the Landlord’s consent will be required and the Landlord will frequently insist on a guarantee;
- Secured Lending – are there any charges registered at Companies House (particularly debentures)? If a business and assets are being sold then the items being sold will have to be released from the charge. If shares are being sold, the vast majority of security documents will contain a “change of control” provision which entitles the Lender to enforce the security if there is a change of ownership to which they have not given prior consent – so consent will need to be obtained;
- Pensions: pension requirements are now extensive. A buyer will want full information on arrangements (both current and past) to ensure that unforeseen liabilities are not taken on either with the shares or in relation to workers “inherited” with the business (and assets) due to transfer of undertaking provisions.
For share sales the issue of statutory books and registers also almost always arises. The company has an obligation under the Companies Act 2006 to keep registers (register of directors, register of shareholders, register of people with significant control etc) setting out specific information as required by the Act. The argument that these are not, in fact, required by the buyer is unlikely to convince the buyer’s legal adviser (see below).
Speaking to an experienced commercial solicitor as early as possible in the sale process will enable any potential issues with the information and documentation that the seller is able to provide to be spotted and addressed at that stage. Lenders and Landlords (and pension providers) are notoriously slow to respond and are unlikely to be moved by statements that items are required urgently because of an imminent planned completion.
Dealing with the Buyer on an Equal Footing
I do not have enough fingers on my hand to count the number of business sales in which I have been involved where the seller has been told that the buyer will not be instructing a solicitor to advise them on the transaction.
Almost invariably this turns out not to be the case.
Very few of the people who have the necessary funds available are prepared to part with significant sums of money (and take on significant potential liabilities) without being advised. Sometimes they will have in-house lawyers, on other occasions they will have contacts with advisers who do not (at the outset at least) have open involvement in the transaction. The advisers are still there however, in the background, considering and advising.
If you undertake a commercial transaction in which the other party is advised and you are not advised yourself there is a significant risk you will lose out both commercially and in other ways.
Nobody is, then, questioning the key role of accountants and, indeed, of commercial agents (or “business transfer agents”) in business sales. As the person selling the business it is however in your best interest to also involve an experienced commercial solicitor and to do so as early as possible.
Get in Touch
The Property & Commercial Department at Barrett & Co would be delighted to help with your sale, you can call us on 0118 958 9711 or email Martin at [email protected] We look forward to hearing from you.