Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
Many business owners assume that they will not be able to sell their business or that it will be too complicated, time-consuming and/or expensive to do so. Accordingly, they end up liquidating their businesses rather than selling them notwithstanding the fact that they are solvent and profitable. Typically, liquidation allows a business owner to obtain a payment for some of the physical assets of the business, often at relatively low (or fire-sale) values. However, when you sell a business, you usually sell the goodwill of the business (including the value of the business name, reputation, customers and other similar intangible assets) in addition to the physical assets of the business.
Liquidation involves selling assets (possibly with assistance from liquidation sale experts), collecting outstanding receivables, paying off debts, addressing contractual commitments, releasing employees, and finalising legal and financial obligations to close your business. For owners of small businesses with significant weaknesses or solvency issues who seek immediate business exits, liquidation is likely to be the easiest and fastest way to recover some value and invest no further funds or efforts before leaving the business behind.
In determining whether you are likely to be able to sell your business, you need to determine whether a buyer is likely to be willing to pay you a sum of money for the goodwill of your business (or other key assets) which exceeds the likely sale value of the physical assets on liquidation. You will then need to take into account other related personal, financial and business issues (for example, the costs involved in selling your business).
Once you have determined that the value of your business is greater than the value that you are likely to obtain for selling its physical assets, you need to consider who may be willing to purchase your business, the basis on which they are likely to wish to do so and the time, cost, risk and other relevant factors that may have an impact upon your decision.
There are many potential categories of buyer and numerous ways of structuring transactions. The potential categories of buyer may be divided into 5 broad groups – family, co-owners of the business, employees, external third parties and the public. You should try to determine what type of buyer and transaction structure is right for you having regard to the nature of your business and your overall personal, financial and business objectives and goals.
Sellers often sell or pass control of their businesses to other family members (most commonly, their children). This sale approach is likely to be more appropriate when the acquiring family members are (or have been) working in the business. It may involve delicate family, management and employee issues, which will need to be considered and managed appropriately. Key employees and non-purchasing family members may have concerns about who controls the business once it has been sold to another family member.
When a business has been set up by more than one person, there is often an ownership agreement (for example, a partnership agreement, LLP agreement or shareholders’ agreement, depending on the nature of the business entity). Such ownership agreements often set out the circumstances in which a person may sell or transfer (or may be forced to sell or transfer) their part of the business and a mechanism for determining the price to be paid for the seller’s part of the business. Such agreements also often include restrictions on the identity of purchasers (or transferees) and pre-emption rights in favour of (all or some of) the other co-owners or, where it is a corporate entity, the entity itself.
Sometimes the most logical purchaser is an employee or group of employees. Typically, this may take the form of a management buy-out (MBO), where an employee or group of employees who have played an active role in the management of the business or closely involved in its day to day operations buy out the existing business owner. In many cases, it may be that if some or all of these people leave the business, the value of the business will be affected significantly. However, it may also be possible to sell to a broader group of employees (for example, via an Employee Stock Ownership Plan (ESOP)).
Depending on factors such as the size, nature and value of the business being sold, the third party could be any legal person from an individual or group of individuals seeking to enter into business to a large commercial company.
An individual or group of Individuals wishing to enter into business often prefer to buy an existing business rather than start a new business in order to reduce start-up risks, to enjoy the immediate benefits of sales and cash flow, and to benefit from established systems, clientele, and reputation. Where funding is required, it is also often easier to finance a business purchase than a business start-up.
Typical types of commercial company buyers in this category are suppliers, competitors or customers who are seeking to expand the capabilities, market reach, competitiveness and/or profitability of an established business. They are usually larger and stronger than the business being purchased. They may wish to integrate the seller’s business with their other businesses and may see the potential for cost savings (and increased profits) through such integration.
This is the process that enables a company to sells its shares to the public on a public market for the first time. Typically, it will involve a private company (with relatively few directors and shareholders, who are subject to limited scrutiny under the rules applicable to most private companies) being converted into a public company. That public company will then be listed on a public market where the public will be able to buy and sell its shares. Publicly listed companies may have thousands of shareholders. They are subject to strict rules and regulations in order to protect shareholders.
In the UK, public listed companies sell their shares on the London Stock Exchange (LSE). The LSE has 2 public markets - the Main Market and the Alternative Investment Market (AIM). AIM is the market for smaller, growing companies.
The costs of an IPO are usually high and shareholders rarely have as much control after the IPO has taken place as they may expect. Usually, owner manager shareholders are locked in to the Company for a period of time after the IPO takes place. During this period they are unable to sell their shares and, accordingly, an IPO will not enable them to have immediate access to capital.
By planning ahead, the seller can anticipate what type of buyer he is likely to be able to attract, the format a transaction with that type of buyer is likely to take, the information and documentation a buyer is likely to require and whether such a transaction is likely to fit with the seller’s overall personal, financial and business objectives and goals. Such preparation, planning and organisation is likely to make the business sale process more efficient and project the image of a well-run business. Consequently, it is likely to help the seller maximise its price and minimise its risk.
Ultimately every decision to sell a business and every business sale is based on individual circumstances. There is value in most businesses so, if you wish to sell your business, there is always likely to be a buyer no matter what your reasons are for wishing to sell it. However, the earlier you create an exit strategy and start preparing your business for sale, the better your chances are of maximising your sale price and minimising your risk. In order to maximise your return from your sale, you need to be in control of the process from start to finish, which requires detailed thought, preparation and planning.
If you would like to discuss the sale of your business, please contact us. We can help you to plan and prepare your business for sale in a way that is right for you and your business.
Whatever stage of the business sale process you have reached, we can help you to understand the business sale process, to choose the option that is right for you and to realise the value of your business.
If you would like more information about selling businesses or would like to discuss a potential or existing transaction, please contact us by telephone on +44 (0)20 3126 4520 or +45 38 88 16 00 or by email at enquiries@orrlitchfield.com
Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full Legal Notices on our website.
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