Selling Your Business

If you are thinking of selling your business, you first need to establish whether you wish to sell your whole business or a specific part of it.

You should engage your accountants, tax advisors and one of our specialist business law solicitors as early as possible to discuss and plan your proposed sale from a financial, legal and tax perspective. It may be that certain pre-sale steps need to be taken in order to achieve the best sale price for your business, resolve issues that may be of concern to potential buyers or to create tax efficiency for you. Your accountants or other appropriate advisors will be able to value your business. You may then wish to instruct an agent or corporate finance advisor to market your business for sale. However, if an agent is involved you should always be mindful of fees and terms of engagement and should run them by a corporate solicitor before signing to ensure you are fully aware of the small print which will be binding.

Alternatively, you may feel comfortable in marketing your business for sale yourself. The most important thing is that you seek advice from appropriate advisors at an early stage so that they can advise on, and assist you throughout, each stage of the process.

When going through a merger or acquisition, the seller has no legal duty to disclose to the buyer any issues, defects or liabilities affecting the business. The buyer needs to conduct its own investigations, which is known as the due diligence exercise.

Due diligence can take the form of commercial, legal, accounting, financial and tax investigations (amongst other things) and may involve various different advisors such as solicitors, accountants, tax advisors and specialist advisors (for example, health and safety or environmental consultants).

The extent of due diligence will depend on the specifics of the transaction, what is being sold, the size and nature of the business and the buyer’s appetite for risk.

The aim of due diligence is to uncover any problem areas in relation to the business enabling a buyer to:

• make an informed decision as to whether it wishes to proceed to purchase the business;
• assess whether the purchase price offered is fair or whether there will be any issues or liabilities post completion that should result in a reduction to the purchase price;
• have a rounded view and understanding of the business and assets that it is acquiring and any liabilities that are being assumed;
• to know whether any post-completion actions need to be taken;
• to negotiate further protections from the seller in the sale and purchase agreement with regard to known liabilities or concerns; and
• determine whether any additional contracts or documents are required in relation to the transaction.

In short, yes, a shareholder can freely transfer his shares to another person provided there are no restrictions upon the shareholder from doing so under the articles of association of the company in question or any agreement between the shareholders (or otherwise) relating to the shares of the company.

The articles of association of the company and any shareholders’ agreements must therefore be checked before transferring shares to a third party. There are no restrictions on the transfer of shares included in the model articles of association for companies, but it is common practice for private companies to have bespoke articles of association which incorporate such provisions or for such restrictions to be contained in a shareholder agreement.

It is important to take advice from your accountant and/or tax advisor, as well as one of our specialist business law solicitors, when you are considering selling your business as they will be able to advise on the best structure for the sale. An asset sale and a share sale have different effects for a seller from both a legal and tax perspective.

In a share sale the buyer will acquire the shares in the company from which your business is traded. This means that the company retains ownership of its business, assets and liabilities and continues to operate and trade in its usual way without interruption. The only thing that changes is who owns the shares in the company.

From a legal perspective, sellers generally prefer share sales where they are selling all of the business, as all liabilities of the business remain with the company, meaning you would achieve a clean break and would not have to go through winding up the company. In an asset sale a buyer acquires the business (the goodwill) and associated assets to the business that the seller and the buyer agree are to be sold.

In an asset sale the buyer will ‘cherry pick’ which assets it wishes to acquire and will only agree that limited liabilities (if any at all) will pass to it. Generally, most liabilities arising before completion of the transaction remain with the seller.

To this end, from a legal and tax perspective, buyers usually prefer asset purchases. Asset sales are appropriate for sellers who wish to sell only a part of their business or certain assets but wish to retain the rest. Whether a transaction proceeds as a share sale or an asset sale will ultimately be a commercial decision for the parties to the transaction but may depend on the following:

• the tax consequences for the sellers and the buyer;
• the bargaining power of the parties – who wants the sale or purchase more;
• what is the economic climate at the time of the sale and purchase;
• what are the terms that are being offered;
• whether there would be any difficulties in transferring the business or any of the assets such as obtaining consent from regulatory bodies, third parties in respect of key contracts, landlords in relation to any properties out of which the businesses are traded; and
• the existence of any extensive liabilities of a company.

If you are considering selling your business, it is important to plan ahead and take advice from the right professionals so that you understand the legal and tax implications of the sale structures which will enable you to find a structure best suited to you.

What happens to your employees will depend on whether the transaction is an asset sale or a share sale. For a brief explanation of the difference between an asset sale and a share sale, see our FAQ ‘Should I sell the shares in my company or just the business and its assets?’ above.

In a share sale, only the ownership of the shares in your company will change and there will be no change of employer for the employees. Your employees will remain employed by the company after you have sold your shares on the same terms and conditions as when you owned the shares in the company. Any changes affecting or regarding the employees following completion would need to be effected by the company (under its new ownership and management) in accordance with applicable employment law.

Generally speaking, if you transfer your business (or part of your business) through an asset sale, and there are employees who work in your business, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will apply. TUPE gives your employees the automatic right to transfer their employment to the buyer and to continue to be employed by the buyer in the business following the sale. TUPE provides that the employees’ employment will transfer to the buyer on the same terms and conditions with no change to the employees’ length of service or benefits. TUPE lays down procedural steps that must be followed in relation to the transfer of a business. TUPE also applies to those persons who work in the business under ‘worker’ status.

It is extremely important that you take legal advice if you have employees (or ‘workers’) and you wish to sell your business, particularly where TUPE will apply. It is the responsibility of both the outgoing and incoming employer to ensure that TUPE provisions are complied with.  Severe penalties can be imposed by employment tribunals on both the parties for non-compliance and/or employee dismissals by reason of, or reasons associated with, a business transfer.

For advice on TUPE and other business-related employment issues, our team of dedicated employment solicitors are able to help.

A contract can be transferred by a party to the contract in question either by assignment or novation.

Assignment is the process of transferring the rights of a party under a contract to a third party. Novation is the process of transferring the rights and obligations of a party under a contract to another third party. Unless an assignment is prohibited or restricted in a contract, a party may generally assign its rights under the contract to a third party without the consent of the other party to the contract. A person cannot usually assign its obligations under a contract meaning the obligations may remain with the original party.

A novation cancels the current contract with the existing parties and creates a new contract with the new parties and therefore generally requires the consent of all parties involved in the novation. The starting point, therefore, is to review your contract terms and to consider whether you are transferring only rights under a contract or transferring both your rights and your obligations. This will determine whether you are able to assign your contract (with or without consent) or whether you need to novate the contract. There are various ways in which an assignment and a novation can be effected and it is important to seek legal advice in this respect.

The typical way to protect your business name and logo with regard to goods and/or services that you provide within your business is by registering your business name and logo as a trade mark at the Intellectual Property Office.

Trade marks may also comprise slogans, symbols, colours and, interestingly, smells. Intellectual property is a complex area and often specialist intellectual property attorneys are needed to assist. We can help you in the registration of trade marks, but other intellectual property matters (including intellectual property disputes) may need to be dealt with by specialists in that field.

The short answer is no unless you have a contractual right to do so. You may have such a right in a shareholders’ agreement, option agreement or the articles of association of the company in which the shares are held. It is therefore important that you take legal advice before transferring your shares to another person for any reason.