Recently one of our deal managers took a call from a business owner I knew from local networking meetings. He had received an unsolicited offer for his company and was involved in negotiations with the potential buyer. In the last couple of weeks things had started to go wrong. The owner had never sold a company before and was learning on his feet. A number of issues had come up that the seller saw as a reduction of the original offer. The buyer was adamant they were a normal part of any company sale process.
The owner was trying to handle the negotiation himself to save fees on advisors. Negotiating complex customer contracts was a regular part of his business and how could a company sale contract be any more difficult? From a certain perspective this might be true; but selling a company has its own jargon and peculiar issues. Some of the issues are unusually complex and it is easy to make an expensive mistake.
So what are some of the issues that are peculiar to a company sale process?
If you are trading through a limited company a buyer will make either an offer for the shares of the company or its trading assets. In the UK selling shares has a big tax advantage for the seller. For the buyer a share sale carries more risk. Buyers will expect to negotiate a contract that leaves the buyer with long term obligations to pay the costs of any pre-sale problems.
Most offers are made 'Free of cash and debt'. At its simplest level this means that part of the offer price will be used to pay off any debt in the company. Debt includes not only bank loans but also overdrafts, invoice discount advances and outstanding balances on finance leases and hire purchase agreements.
If an offer is made for shares the seller will be expected to maintain normal levels of working capital in the company (Trade debtors, trade creditors and stocks) prior to the sale. If working capital at the date of sale is less than expected the shortfall will be deducted from the selling price.
The seller will have to pay Corporation Tax up to the date of sale. Typically an estimate of the tax bill will be deducted from the selling price at closing and held in a reserve to pay the bill when due.
In a share sale part up to 20% of the selling price will be held in a reserve to settle any claims that arise under the contract. The reserve might be held for between one and two years.
For a business owner that has never sold a company before some of these issues might come as a shock. My advice would always be to involve an accountant, solicitor or business broker with extensive experience of this type of negotiation. Selling a company is one of the few occasions in business where there is no second chance. Think of any fees incurred as protection against an expensive mistake.
Robert John Kemp is Managing Director of UK Business Broker Select Business Sales. Select specialise in retirement sales of private companies.
Visit our website to find out more: http://www.sellingprivatecompanies.co.uk
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