Associate Lucille Moala runs through the crucial steps to consider when preparing your business for sale, exploring key aspects such as non-disclosure agreements (NDAs), valuations, and the importance of a well-drafted term sheet to ensure a smooth sale process.
A considerable amount of work goes into preparing your business for sale and it all starts well before the sale agreement is signed and announcements are made. There are three key points which will need to be dealt with at an early stage:
- non-disclosure agreements (NDAs) should be entered into before you share any confidential information about your business with potential buyers
- decisions need to be made about how your company is valued
- a term sheet should be drawn up which sets out the key items that are agreed between you and the potential buyer
Non-disclosure agreements (NDAs)
As a seller, it is important to enter into NDAs before any confidential information about your business is shared with potential buyers so that all parties understand exactly what the nature of their rights and obligations are.
NDAs are particularly important as they will protect your trade secrets, intellectual property, terms you have with key suppliers or customers and more.
Legal input when drafting and negotiating NDAs is crucial to ensure your confidential information is adequately protected.
A buyer will want to make sure it can receive as much information about your business as possible in order for the buyer to consider whether the business is actually worth buying. A buyer will also want to make sure it can distribute the information that you share to its advisors and internal employees, consultants and others who need to know the information in order to progress the purchase of your business. Your legal advisors will ensure that this type of dissemination of information is possible whilst continuing to protect your confidential information.
Lawyers are not able to give valuation advice. However one key item for all parties is 'how' your business is valued, as this is likely to determine the headline purchase price for the deal.
Valuation advice is given by accountants and/or corporate finance advisors who will be able to discuss with you differing valuation methods which can then be used as a starting point for pricing your company. There may well be two phases to this initial valuation process:
- obtaining your own preliminary advice to determine if an exit at an acceptable price is likely to be viable, and the type of offers you should be expecting to receive; and
- evaluating and negotiating any offers – although ultimately most discussions around valuation will come down to commercial negotiation, being able to underpin those discussions with objective and informed insight is a powerful tool.
Also, valuations usually remain subject to the buyer’s due diligence.
A properly drafted term sheet usually indicates that due thought has been put into the sale or purchase of your business. An appropriately drafted Term Sheet considers what the key transaction documents should cover and the overall structure of the transaction and can lead to significant savings in time and legal costs when it comes to drafting and negotiating the transaction documents. This is because all parties have come to an understanding on crucial terms on the key transaction documents before the drafting of those documents has commenced.
Important themes to consider in a term sheet include:
This is probably the first matter that comes to mind when drafting a term sheet. Hopefully the headline price will already have been determined at a preliminary stage, as outlined above. But as well as that initial figure, it is also important to determine how the purchase price will be paid. Will it be paid in total at completion or deferred? There are also a number of mechanisms that the parties can agree which will result in price adjustments to the headline price (of which the most common are completion accounts and locked box).
Buyers might push for exclusivity as this will stop the seller from negotiating with other potential buyers and/or continuing to solicit further offers for their business.
We know that there will be a share purchase agreement dealing with the transfer of shares (or asset purchase agreement dealing with the transfer of assets) from the seller to the buyer but sometimes other documentation is required too. For example, will managers of the seller’s business be staying on after the transaction? If so, you might consider putting new service agreements in place. If the seller is retaining a stake in the business, a (new) shareholders’ agreement may be necessary. (The documentation considerations will differ if it is an asset sale.)
Term sheets are usually only binding as to exclusivity and confidentiality. Otherwise all other items are generally subject to completion of due diligence by the buyer and negotiation of the legal documents. However it may be a condition of the transaction that insurance or regulatory requirements are satisfied or consent from key suppliers or customers or stakeholders is obtained.
Lucille Moala is in the corporate and commercial team, advising companies and investors on debt and equity financings, private equity buyouts, M&A transactions, group restructuring, shareholders’ and founders’ agreements and general corporate governance issues in addition to key commercial contracts, intellectual property and brand protection.
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