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Understanding the paperwork when selling your business

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The thought of selling your business can be stressful. It’s a decision nobody chooses lightly and involves much deliberation over whether the time is right. 

One undertaking is gathering the required documentation. 

Preserving confidentiality

When your business goes on the market, you will have to share details of contracts, accounts and business practices with potential buyers, many of whom may be competitors. This can leave you open to abuse: 

• Rival businesses can obtain data under the pretence of being potential buyers

• Sensitive information becomes public and affects confidence in the business

To ensure that any information you share cannot be used in a way that can be detrimental to you without incurring legal repercussions, the prospective buyer must sign a confidentiality agreement before gaining access to documents. 

Outlining terms 

Once you are confident that your information will be secure, you can issue a sales memorandum

This is effectively a prospectus; whilst non-binding, this gives an outline of all aspects relevant to sale negotiations, including: 

• The business sector

• Specific assets for sale

• The terms under which you are selling; such as leasehold or freehold

• The history of your company

• Financial records; including turnover, profits and debt

• Staffing information

As negotiations proceed, you may mutually change some aspects, and these new agreements will be outlined in your heads of terms document. 

Heads of terms

Variously described as agreeing principles, a letter of intent, or a memorandum of understanding, this shows the progression to a serious intent to form an agreement. 

Although still not at the stage of being a legally binding commitment to a sale, it represents a significant step in that direction. 

It would cover only the main points which include: 

• The price, perhaps also including an explanatory breakdown of this decision.

• How payment should be made, for example, whether it would be a cash transaction, bank transfer, via a lump sum or in instalments.

• Profitability clauses affecting future payments.

• Transferal of staff in or out.

• A schedule of expected progress.

Whilst the document does not legally oblige either party to complete the sale, the elements within the document would be legally binding if the sale should proceed. 

Making a contract 

Having agreed in principle, a legally binding document is produced, stating who is selling what to whom and how. This is the business purchase agreement. It must show any clauses or conditions, specify any financial or legal liabilities to be transferred and how any conflicts would be resolved. 

Additionally, you must issue a promissory note, setting out the money owed and how and when it will be paid. 

The final step

With everything agreed, all that remains is the exchange of hand-over documents. The legal team will collate a pack, consisting of: 

Financial papers, including bank and tax statements and the payment schedule.

• Documents supporting any claims relating to the business, such as contracts with suppliers, customers or staff.

• A document agreeing to compensate the buyer for the adverse effects of anything significant the seller has not disclosed.

• Outline of expectations of continuing involvement after the sale, where applicable.

• Documents transferring leases, licences and contracts to the new owner.

• A guarantee that the seller will not start a new business nearby, for at least a given period.

• The contract of sale.

This may be the most stressful part of the process, due to its finality, but is also the point at which the light at the end of the tunnel appears. 

Gathering documentation for a sale requires stringent checks on whether licences are up to date, contracts are fit for purpose and financial and legal details are accurate. 

However, with the right support and an understanding of the requirements, selling your business can be the step that paves the way to a brighter future for you, your workforce and customers.

By Jo Thornley, Head of Brand and Partnerships at Dynamis. Joining in 2005 to co-ordinate PR and communications and produce editorial across all business brands. She earned her spurs managing the communications strategy and now creates and develops partnerships between, and and likeminded companies.