| What we have considered so far – valuation, finding a buyer, preparing the business for sale – might seem like the lion’s share of the work you need to do. But the process of selling a business can take far longer than the time accounted for by these more creative aspects. Negotiations, administration and legal technicalities can all be incredibly time-consuming and frustrating, but are a necessary evil. An ‘Information Memorandum’ is the first official document you need to draw up when a business is being sold. It is essentially the formal advertisement of your business’s strengths and wellbeing – and the fact that you want to sell it. It can be difficult to draw up a document that emphasises the company’s good points and renders it attractive to potential buyers, without giving too many of its secrets away to all your competitors. Thankfully, if you have an adviser, they will normally draw up the memorandum as part of their fee. But they will need your cooperation to achieve this, as almost everything it contains will be information you have given them. And, needless to say, you should inspect the document closely before allowing it to be circulated. The memorandum should explain the history of the business for sale – how it was created and the key steps involved in getting it to where it is today. And it should explain how it differs from its rivals in the market, while giving details of the ownership structure and – most importantly – why you are selling it. Buyers will also expect you to give details of where you are located, what lease obligations you have or what buildings you own, and – if you have more than one office, factory, shop or restaurant – what happens at each one. They will also expect full details of the staff you employ. What terms are they employed on? What is the hierarchy at the business? And so on. Be particular about the particulars This is enough to give the buyer a rough idea of the company up for grabs, but you will need to be more specific about its income stream. What do you sell? Who do you sell it to? You will need to paint a very detailed picture of the customer base, how your product is sold and bought, and which customers are most important to you. On the input side, you need to explain how you buy raw materials (whatever they may be – services included, of course), how they are brought in and precisely what you do with them. What do you have, in either physical or abstract terms, that enables you to produce a valuable, in-demand end result? Finally – and most arduously – you need to provide buyers with a rough idea of the financial health of your business. This could come in the form of simplified company reports – historic turnover and profits, the value of the business’s assets, why extraordinary items are excluded from figures, and any liabilities and debts the business might have. Most buyers will expect profit forecasts, too. Potential buyers will scrutinise this part of the memorandum more than any other, and therefore merits a commensurate amount of attention from you when the memorandum is drawn up. Forecasts should be realistic and detailed, and based on carefully gathered evidence; any improbable figures are likely to damage the entire credibility of the document. Bear in mind that it is not just aimed at the layman – the eventual buyer’s accountant will be closely examining the whole picture. Remember, too, that much of the content of an information memorandum is very sensitive. You are exposing the workings of your business to third parties. If it is a competitor, ensure that you do not release detailed information until you are entirely convinced that an approach is serious; you do not want to give away your corporate secrets to the market. Whatever the situation, though, you should ensure that your adviser or lawyer draws up a wide-ranging confidentiality agreement that potential vendors can be made to sign before they see the information memorandum. We have already considered how you and your adviser can identify buyers and make confidential approaches. Initial meetings, where you should discuss the marketplace and the issues your business faces, should enable you to further narrow the field to a few shortlisted parties. Allowing potential buyers to visit your premises and see your business in action could speed up the process, but poses further confidentiality issues. On the other hand, having a reasonable number of interested parties will bring an element of competition and urgency to the negotiation process, hopefully driving up the end price. Money, money, money But getting the biggest offer from buyers should not be your only consideration. A figure written on a piece of paper is just that – unless the potential buyer provides some evidence of their ability to pay. This could take the form of bank account details, share certificates or other financial documentation. In return, the buyer may want warranties of the business’s assets and general health (remember that this is a legal document, meaning that the buyer can claim against you in the future if your figures prove unfounded or inaccurate). Think, too, about how you want to be paid – cash, shares in the buying business, or some sort of earn-out arrangement are all possible, but each will have different tax implications. The proposed timeframe is also crucial; make sure it fits in with your own targets. An offer, however, does not just detail how much a buyer is prepared to pay. It will also outline your obligations after the transaction. You may be asked to indemnify the buyer against certain events – i.e., to agree to pay any fines or penalties resulting from the handling of the business’s affairs before the sale. Agreeing to such measures can fetch a higher price, although you should demand absolute clarity over what exactly you are liable for. Your adviser and lawyer will both be able to explain the implications of any such agreements – a matter we will return to later. You must also think about the fate of your staff before you begin the negotiation process. Your company will have legal requirements under TUPE – the Transfer of Undertakings (Protection of Employment) Regulations – but it is also worth considering how to retain staff in the long-term; this will boost your buyers’ faith in the human resources element of the package they are considering buying. By this point, you should have a reasonable understanding of what each of your shortlisted buyers is putting on the table – and so can begin to enter into more detailed talks with them. It is possible to hold talks with more than one party – in fact a competitive situation can enhance the final results – but it can be difficult to juggle a number of different talks. You do not want to take up so much of your time dealing with the business sale that you forget to run your business! Furthermore, your potential buyers may become less interested in buying if they believe they have a low chance of being successful. On the other hand, implying you have other offers – for example, by restricting the amount of times you meet your buyer, or by maintaining a sense of distance – can inject a sense of urgency in your potential buyers, and keep them interested. Some vendors will not actually meet suitors until they submit an offer price, which allows you to screen out timewasters and get an idea of the value the market attaches to your business. But before you begin negotiating selling your business, ensure you agree a strategy with your broker, if you have one. Negotiation is a skill, and your representative will (or at least should) have learnt the tricks of the trade through experience of many other deals. Some experts recommend that you remain completely absent from the negotiating table, leaving all the detail in the hands of your adviser. It will be easier for you to say no if you are a distant authority with absolute veto, and you will not be forced to get involved in the fine detail of the deal. However, the final deal will have to be agreed by the actual vendor – you – and you will have to set the boundaries of any negotiations in terms of price, future commitment and timing. The type of deal you want, or expect, should be understood. For example: what is the lowest price you would accept? When do you want to see the business sold? Would you be prepared to work as a consultant for a period? Or even remain as an employee as part of an ‘earn-out’ agreement? Don’t forget the tax It is worth thinking about tax implications early on, too. If you have no broker and /or your accountant is not a tax specialist, it might even be worth contacting an expert in the rules and regulations of the Inland Revenue. Emigrating can prove the most tax-efficient route, but not everyone wants to leave Britain. If you remain you will be liable, in some form, for capital gains tax. There are a variety of ways to reduce this: by selling stock rather than the actual business, by rolling over some of the proceeds into another company, or through Business Asset Taper Relief (introduced in 1998), which provides some relief on capital gains on assets held for a certain amount of time. Negotiate The basics of negotiation are simple: know your strengths and use them, while defending the weaker aspects of your business. Be polite but firm and do not be afraid to walk away from a deal – although you should not threaten to end talks to try to get your own way. Honesty is the best policy, as you need the other party to trust you. But you should never reveal your negotiating position – i.e., what you actually want to achieve at the end of the process. Put simply: be cool. You do not want to appear overenthusiastic, or even desperate, during the negotiation period. The real key to successful deal-making, however, is to understand your buyer’s wants and needs. What features of your business do they like? What are their own business’s priorities and how will your company help them achieve it, if bought? What are their alternatives in the current marketplace? Try to work out their negotiating position and what sort of deal they would like to see. Your mission, in a nutshell, will be to find out (and hopefully inflate) the maximum the buyer is prepared to pay for your company, while deciding whether you are ready to make all the commitments and concessions that receiving a cheque for that sum is contingent on, according to the demands of the buyer. If the terms are too stringent, you need to decide what sort of figure you would accept for a more complete break from your company. You then need to decide which areas of your sale terms are open to negotiation, and identify what sort of concessions you might make – without admitting that you will ever make any such move. Indeed, it might be worth asking your buyer which areas he is particularly concerned about and focusing on those before you discuss price or technicalities. Be aware, however, of a number of common negotiating tactics that the other party might use – and which you could use yourself. If you find yourself in a tricky negotiation position, ask for more time to discuss the matter with another adviser, lawyer or partner. On the other hand, if you feel you are close to securing a deal, it is entirely possible to invent a deadline in an attempt to force closure. Remember your priorities and that you cannot win every battle, but can, potentially, win all the important ones. Do not concede on your main points – such as price – and do not get trapped into justifying your basic negotiating position. As you work through the various conditions of the deal, ensure that all parties – your buyer, your representatives and yourself – completely understand what is being agreed. While verbal agreements are difficult to prove, shaking hands when tricky parts of the sale conditions are resolved can help matters – few people will want to renege on an agreement after making this customary gesture of the gentleman’s agreement. The letter of intent The beginnings of a formal sale document lie in finalising a ‘heads of terms’ agreement – sometimes known as a letter of intent. Your advisers and lawyers should be fully involved in drawing up this agreement. As the name suggests, it will set out what the transaction actually involves, explaining what will be paid and when, what assets the company has, the contractual obligations already in place, other liabilities, employment contracts, and precisely what the buyer will be purchasing. This agreement will only be made with your preferred buyer, and will give them exclusivity, or at least a period of it. The document can be used as background to further negotiation, and may be legally binding. Some heads of terms force the buyer or seller to pay legal fees if they back out. Of course, in many cases it is just a preliminary document, which will undergo many changes before it becomes the holy grail: the sale and purchase agreement drafted by your lawyer. Most sales and purchase agreements are rather intimidating documents, often impressively thick and written almost entirely in legalese. Most of it will be technical formalities related to acts of parliament governing tax and company matters. However, you should still read through the document and ask your solicitor to explain every clause you do not understand. It is possibly the most significant document you will ever sign, and there are a number of areas you should be particularly aware of. You should also be aware of the temptation for your lawyer to argue ad infinitum over the fine detail to increase his fees. If you can, agree a fixed rate to get him or her to finalise the document as efficiently as possible. The agreement will basically state what is being sold and for how much, what exactly happens on completion, how existing contracts and debts are transferred, and any warranties or indemnities. It could also include a restrictive covenant preventing you – within a particular time period and/or geographic area – from competing with the business once it is sold. Earn-out An earn-out period can be incorporated into the deal. An earn-out period is a contractual commitment made by a buyer acquiring a company to pay money to the vendor at specified points in the future. But these payments are contingent on the company meeting certain pre-agreed financial targets. Earn-outs are most common if your knowledge and experience is so critical to the health of the business that a one-payment sale and abrupt severance of ties is likely to see its value fall. By staying on in some capacity during the earn-out period you can pass on your knowledge and experience, and ensure a smooth transition. Pay particular attention to whether the amount you finally receive is related to your performance during that period, precisely how it is linked (a percentage of profit, for example) and whether you will have total control over the business. Clearly, if the new owner can override your decisions, you cannot be regarded as being entirely responsible for the business’ financial fate – and therefore will feel uneasy about whether the targets against which the payments are measured can be met. Earn-out periods are generally no longer than three years. Anything longer than this is not recommended. An earn-out period can significantly increase the offer made by the buyer. Earn-outs are an effective means of bridging the gap between the price a vendor expects and the offer a buyer is prepared make. Don’t get caught in a trap Warranties and indemnities present the biggest set of traps for a vendor. Warranties are a statement of facts about the business. If the warranty is found later to be misleading or incorrect then the purchaser can claim compensation if such an arrangement has been made. An indemnity on the other hand, is an agreement made by the vendor to compensate the buyer for liabilities acquired after the sale. Indemnities are stronger than warranties, making you directly liable for any loss without any need to go to the courts. Clearly, it is vitally important for you to run through the warranties and indemnities to ensure that you absolutely agree with each one – although you should remember that some are put forward by solicitors as part of a negotiating strategy, to get you to answer questions about your company that otherwise you might decline to answer. Once the agreement is drafted in a manner acceptable to both parties, it is signed. Then the business and its assets will be transferred to the buyer, and a cheque or share certificate presented to the vendor – all in the manner prescribed by the agreement. All your hard work has been crystallised into cold, hard cash. The only thing left for you to do is decide how to invest or spend it, and whether to retire, emigrate or pursue a new business interest. But that, of course, will be up to you. | 
