Top 4 FAQs about selling a business

1. What types of business sales are there?

There are two main options when it comes to selling a business:

1. Selling the shares in the company - this involves the transfer of ownership of the shares from the existing shareholder(s) (known as the seller(s) to the buyer(s). The buyer will obtain all the rights associated with those shares by becoming the new shareholders of the target company, including voting rights and rights to receive dividends.

2. Selling the business or assets of the company - this can be known as an “asset sale”. An asset sale is where a business’s assets are being sold, but not the company itself (i.e. its shares). For example, this could be where a buyer is interested in acquiring only certain assets or divisions of a seller's business, such as equipment, intellectual property, customer lists, contracts, or inventory.

Find out more about the differences between asset sales and share sales here.

2. What steps should I take to prepare my business for sale?

Preparing your business for sale is a strategic process that involves various steps to maximise its value and make it more attractive to potential buyers. Before selling a business, the steps required could include, for example:

1. Financial preparation - ensuring that financial statements are accurate and up-to-date, including revenue statements, balance sheets and cash flow statements.

2. Legal preparation - the buyer will undertake legal due diligence on the company as part of the transaction. It is therefore important to ensure that steps to achieve legal compliance have been taken, including in relation to intellectual property rights ownership, contractual requirements and employment law compliance.

3. Operational requirements - before selling a business, it is wise to ensure that the condition of all equipment or IT infrastructure being transferred is to a sufficient standard, it has been properly maintained and there are no issues with the equipment’s operating capabilities, as this is likely to be investigated by the buyer during the sale process.

4. Regulatory requirements - if the business is regulated (e.g. by the FCA), you should ensure that all regulatory requirements and authorised are obtained and complied with.

3. What contract do I need when selling a business?

The type of contract needed when selling a business will depend on the type of business sale:

1. Share sale - a share purchase agreement (often known as a SPA) is a legally binding contract that outlines the terms and conditions for the sale of shares in a private limited company from a seller to a buyer. A share purchase agreement gives certainty to the buyer and the seller in relation to their rights, obligations and liabilities regarding the sale and purchase of the shares of the target company. This gives clarity and the parties should know where they stand from the outset. As a result, this lowers the probability of disputes arising later down the line. Find out more about this type of agreement here.

2. Asset sale - an asset purchase agreement is a legally binding contract that outlines the terms and conditions for the sale and transfer of a business (and its assets) from a seller to a buyer. It is a crucial document in the process of buying or selling a business and/or its assets, as it establishes the rights, obligations and responsibilities of both parties involved in the transaction. A well-drafted asset purchase agreement can be crucial for protecting the interests of both the buyer and the seller, ensuring a smooth transaction and minimising the potential for future disputes. Find out more about this type of agreement here.

Docue’s asset purchase agreement and share purchase agreement can both be easily customised to suit the details of your specific transaction.

4. What other legal documents are required for a business sale?

As well as the documents mentioned above, when selling a business, the following documents may also be required:

1. Heads of terms - heads of terms are used to document the key commercial terms and principles that are agreed upon between two parties in relation to a proposed transaction. Heads of terms can sometimes be referred to as a term sheet, letter of intent or memorandum of understanding. Entering into heads of terms can focus the parties' minds so that the most important issues and principles are discussed and agreed upon as early as possible in the negotiation process, speeding up the path to signature.

2. Board minutes - the sale of shares or assets must be approved by the company’s board of directors and documented via board minutes. Docue’s board minutes template contains model content for the approvals needed when selling a business and can be customised in just a matter of minutes.

3. Resignation letters - where directors will be resigning from the board of directors as part of the business sale, the buyer may require evidence of this via a letter of resignation from the director in question. In addition, once a director or secretary resigns from office, Companies House must be notified within 14 days of such date either using Form TM01 (for a director) or Form TM02 (for a secretary) or, if they are a director and a company secretary, both forms.

4. Consent letters - if a new director is being appointed following the business sale, UK company law requires that at any time when an officer (i.e. a director or company secretary) is being appointed, a statement is made to the effect that they have consented to act in that capacity.

Other documents may also be required depending on the type of business sale (e.g. stock transfer form and share certificates for share sales).

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