News

9 January 2008

Window of Opportunity? - Tips for Selling Your Business

Below is an article written by Paul Gilks of Glovers Solicitors LLP. This article will appear in the February edition of The Recruitment Consultant Magazine.

With the Chancellor withdrawing Taper Relief on 6th April 2008, it’s time to act if you are looking to sell your business. Full taper relief is usually available if you are selling shares in a trading company and you have held the shares for more than two years- you will then only be charged tax on any capital gain at a rate of 10%. After 5th April 2008 this will rise to 18%!

Choose your advisers carefully

You’ll need to instruct accountants who can advise you on the most efficient tax structuring for the sale; and solicitors to prepare and advise on the legal documents. You might also consider appointing a corporate finance advisor to assist in preparing a sales memorandum to help you locate a potential purchaser and assist in the negotiations, particularly if there are a number of interested parties. A good personal chemistry with your advisers is crucial.

Prepare heads of terms and confidentiality agreement

‘Heads of Terms’ is a non legally binding document usually no longer than 2 or 3 pages, setting out the main terms of the deal. This will make it easier for your solicitor to start drafting the documents and help to avoid misunderstandings later on in the process.

You should insist on a legally binding confidentiality agreement from the purchaser at an early stage. The purchaser will have access to sensitive information and if the sale does not proceed you will want to avoid approaches to your clients or attempts to poach key employees.

Devote time to purchasers’ enquiries

The purchaser will want to go through detailed due diligence in order to assess the legal, tax and commercial position of the business. It’s important that you answer these enquiries as comprehensively and quickly as possible. This will save time and professional costs in the long run. Due diligence information supplied at the eleventh hour can sometimes postpone or even scupper a deal.

Read the Warranties and disclose fully!

The main legal document for the sale of shares in a Company will be a purchase agreement. This will contain, usually in a Schedule, a series of statements by the seller about the business upon which the purchaser will rely. These are the Warranties. A great deal of the negotiation between the seller and the purchaser will relate to the scope and content of the Warranties and the limitations which may apply to them. Sellers can protect themselves by disclosing any matters which might be inconsistent with the Warranties. Disclosures are contained in a separate document called a disclosure letter prepared by the seller’s solicitors.

Disclosure against the Warranties will potentially protect you from a claim under the share purchase agreement after you have sold your business. Preparing the disclosure letter can be a lengthy process and it is important that you pay particular attention to the Warranties to enable you to make full and accurate disclosures. Whilst your solicitor will be able to present your disclosures in an appropriate way in the disclosure letter, he will not know your business well enough to make disclosures for you!

Negotiation Tactics

Discuss with your solicitor which issues are most likely to be important to you and the purchaser as each side will have different priorities. The art of a successful negotiation is to trade off points that you are not worried about for ones that you are.

For example, the purchaser might want to ensure that there are non-competition covenants in the agreement. You may not be worried about this if you are planning to retire and so agree to this clause in return for the purchaser agreeing a point that you are concerned about.

But remember, key points are often left outstanding until the last minute. This is one of the reasons that completion meetings often last well into the early hours.

Think about what you are going to do after the sale

After completion, you’ll hopefully have a tidy sum to invest or retire with. Make sure therefore that you take appropriate financial advice on the best way to deal with your money for the future.

A final thought

No-one likes paying tax and there will always be an element of tax planning in any sale. However do not let the tax tail wag the dog. A sense of perspective is needed to ensure that the timing of the sale is right for you. Also remember that if you leave completion until the last minute on 5th April 2008, the Purchaser may demand a share of your tax saving as an inducement for him to complete.

Paul Gilks is a Partner with Glovers Solicitors LLP

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