Ever considered selling your business? Here’s a simple summary of the big questions you might have.
Assets or Shares?
One of the first questions you will need to consider is what you are selling. If you’re a sole trader who runs a business personally, you’ll sell the assets of the business. If you’re a company registered with the Companies office you can sell either assets or shares.
This will transfer the ownership of the shares in the company. The entire business, including all of the assets, liabilities (unless otherwise agreed such as contingent tax liabilities), contracts and employees stay with that company. Sellers typically prefer a share sale because of the ease of transferring over the business to the new owner and the fact that the employment relationships stay in place.
However many sellers (and their advisers) fail to consider the implications of the Financial Markets Conduct Act 2013 when selling shares in a company. That Act regulates the transfer of financial products, which are defined to include shares in a company, and provides that if the company advises, encourages, or knowingly assists the shareholder to sell their shares disclosure under the Act will be required unless an exemption exists (e.g. sale is to a close business associate). In the small enterprise space, where the shareholders are typically also the directors running the company, it is hard to argue that the company did not advice, encourage or knowingly assist the transfer.
An asset sale involves individually transferring the assets of the business and key contracts as well as rearranging employment arrangements. The new owner is under no obligation to take on the existing employees and if they do they can impose new employment terms including introducing a 90 day trial period. Further, all liabilities of the business must be considered in isolation and the parties must agree which ones to transfer and which ones not to. Because buyers can pick and choose both assets, employees and liabilities in this scenario they typically want an asset sale.
This is always a tricky one as there are so many different methods of valuation depending on the type of business, the industry and various other market factors. Most methods however take into account one or many of the following factors:
· Asset value, including tangible assets (premises, machinery), stock and intangible assets (goodwill, intellectual property, customer base).
· Liabilities and debt (both to lenders but also to the seller in the form of shareholder loans and retained earnings (i.e. profit not yet distributed).
· Recent profit and future profit potential.
· Industry and market conditions.
Given the complexity of valuing a business we highly recommend you engage not only your accountant but also a professional valuer.
It is an inevitable part of any business sale that the buyer will want to undertake a due diligence process. Typically the buyer will make due diligence a condition of any sale and purchase agreement that they enter into, which means that the agreement is conditional on the buyer being entirely satisfied with their investigations. If they are not satisfied they have a right to cancel the agreement and walk away. Given that during the due diligence process the seller will be supplying commercially sensitive information, it is critical that the buyer is required to enter into a confidentiality agreement. This will ensure that if the sale does not complete the buyer cannot use the information to compete with the seller.
As a business owner, you will no doubt be concerned about the effect of the sale on the employees, some of whom may have been with you for many years.
With an asset sale the buyer is not obliged to take on any of the employees and can elect during the due diligence process who they will take on, if any, and on what terms. As the seller you will have obligations to the employees during the sales process. This includes the following:
· Discuss with the buyer the potential impact on employees and use your best efforts to encourage the buyer to offer all employees ongoing employment on substantially the same terms and conditions as under their existing employment agreements.
· As soon as practicable after these discussions you must meet with all employees and provide them with information about the general nature of the sale including how it is likely to affect them, the estimated timing of the sale, the identity of the buyer and the outcome of your discussions with the buyer about the impact on employees.
· You must give each employee as much opportunity as practicable to consider the information, to discuss it with them, and to suggest other relevant information which you should seek from the buyer.
If the buyer makes no offer of ongoing employment to an employee, or the offer made is not accepted, then you must do the following:
· Discuss with the employee the impact on them again and whether you can offer any additional support to them, e.g. a reference, other employment with you.
· Ensure that any notice periods for termination are complied with and written notification is provided at the correct time in accordance with the employee’s employment agreement.
· Ensure that redundancy payment (if any) is made in accordance with the provision of the employee’s employment agreement.
In a share sale the buyer takes on all of the employees on the terms of their existing employment agreements so it is very important that you ensure all employment agreement have been issued, are up to date and comply with the current employment regulations.
Transferring key contracts
In an asset sale the buyer will require all key contracts, leases, license, registrations, authorisations and other documents to be transferred to it. This will typically include getting the agreement of the other party to the transfer. For example the potential sale may be seriously affected if the landlord to the existing lease is not prepared to consent to an assignment of the lease. Gaining all necessary consents takes time and is often a cause of delay close to settlement.
In a share sale there is no need to transfer any key contracts as the parties have not changed (i.e. the company is still in play). However, the seller will need to check each contract for a change of control provision that requires consent to be given by the other party if the effective management of the company has changed due to the sale of shares.
Restraint of Trade
In many situations the buyer will require the seller to agree not to compete with the business after the sale has been completed. Often such a restraint will define the location and duration (e.g. Greater Wellington region for 3 years). This may seriously affect the seller’s ability to earn a living after a sale so should be considered carefully before being entered into.
There are many factors to consider when thinking about selling your business that we could write a book – if you’ve plans to sell and want advice and assistance tailored to your specific needs get in touch today – email@example.com or phone 04 970 3600