Selling your business is more than just signing a contract. The legal process usually begins with Heads of Terms (also known as a Letter of Intent) letter with the buyer.
This legal document may be drawn up before a chosen bidder is granted a period of exclusivity to conduct due diligence or, in a race to Completion among competing bidders. When one is prepared to sign a document outlining what the buyer has agreed to purchase:
- the payment structure,
- who will pay the costs,
- details of contracts and assets,
- responsibilities to employees and a timetable for completing the purchase.
Usually, this document is not legally binding except for clauses covering exclusivity , if any, and confidentiality.
This Heads of Terms letter serves as a briefing document for your lawyer to draw up the Sale and Purchase Agreement in negotiation with the buyer’s legal team and other advisers.
This is rarely as straightforward as it might seem.
Both sides may have to make compromises before the Sale and Purchase Agreement is signed and you need to be confident that your advisers have ensured that the document does not contain any surprises about your future liabilities.
Warranties and Indemnities
As part of the legal documentation, you will be required to complete a number of additional documents, among which those with the most contentious potential are Warranties and Indemnities.
Warranties are legally binding and state that specific information you provided to the buyer is accurate, such as financial information and the ownership of assets. If you warrant that certain information is accurate and it proves not to be, the buyer may take legal action against you.
However, our experienced lawyers can help you to produce a Disclosure Letter, with the assistance of your other professional advisers, which will help to protect you against potential litigation after the ink has dried. If, for example, there are no outstanding employee disputes but a member of staff has threatened you with action, you should disclose this with a full explanation.
You may also have to agree to Indemnities – these are promises to reimburse the buyer if a liability incurred during your ownership emerges in the future, such as a tax penalty incurred but not imposed during your ownership of the business.
Take great care over the wording and extent of the Warranties and Indemnities. Make sure the Disclosure Letter has been drafted to limit your liabilities and the time period for which they apply.
Legal documents can be tedious at the best of times but resist the temptation to nod them through towards the end of a wearying process. Make sure you have read them thoroughly and fully understand your liabilities and your protection.
At FDR Law our corporate team will take the burden from you and assist you through this process.
Legal documents for a business sale
The documents will, as a minimum, include:
- the Sale and Purchase Agreement
- a tax deed (which in a share purchase is your indemnity against unforeseen tax liabilities)
- the Warranties
- the Indemnities
- the Disclosure Letter
- Non-Compete agreements or Covenants, binding you not to set up a competing business in the same area for a specific time
- Resignation letters from outgoing directors
- PSC letters and notifications
- Completion board minutes
The buyer’s solicitors register the change of ownership and directors at Companies House.
If you want any more information or if you are considering an exit strategy and want some legal advice and assistance then please contact our commercial team on 01925 230 000.
FDR Law is now part of the AIIC Group, which includes top 60 UK law firm Taylor Rose MW. We now offer the same legal services as before as part of the Taylor Rose MW Warrington team.