Selling a business will involve a legal process and require a number of legal documents. Which documents are necessary will depend on whether the transaction is structured as the sale of shares or the sale of assets. Once this decision has been made and agreed, the legal process can start with preliminary documents such as an NDA, heads of terms and an exclusivity agreement and then move on to the principal sale and purchase agreement and ancillary transaction documents.
When you sell a business the legal documents needed depend on the transaction structure
Share sale or a business or asset sale?
The legal documents involved in selling a business will depend upon whether the deal structure is:
- A share sale: the sale of shares in a company
- A business or asset sale: the sale of the assets of a business
Whether a transaction will be structured as a share sale or an asset sale will depend on a number of factors and considerations. These include:
- the circumstances of the seller and the buyer, particularly their tax positions
- the nature and state of the business and what is underlying assets, contracts and liabilities are
- the buyer may wish to choose which assets to acquire and/or to avoid taking on known, unknown and contingent liabilities
- whether any third party consents may be required, depending on the chosen structure, for example to the assignment of a lease or a key commercial contract
- the ease of the due diligence and transaction process
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Legal documents needed for a share sale
A share sale is often the simplest and quickest way to sell a business, particularly a business which is a going concern and not in financial difficulty. When you sell your shares in your company:
- the new owner takes over ownership of the company with all of its assets and liabilities
- the business can carry on as usual immediately after the sale, with limited impact on dealings with employees, suppliers or customers
A share sale does not mean the end of any potential liability for a seller. The buyer will usually require contractual warranties from a seller regarding the company, its business, financial results, assets, and liabilities. The buyer may also require legal protection in the form of an indemnity for pre-completion tax liabilities of the company and also for specific problems that are identified by the buyer during the transaction process.
The principal legal documents involved in the sale of shares in a company are:
- heads of terms: a document, often in the form of a letter of intent, setting out the principal terms which have been agreed (on a non-legally binding basis)
- confidentiality agreement/NDA: an agreement protecting the confidentiality of the information which will be disclosed to the buyer during the sale process. This is important in case negotiations break down and the sale does not proceed
- exclusivity agreement: if agreed, an agreement under which the seller agrees not to sell the company to another buyer for a period of time
- share purchase agreement/SPA: this is the main document for the sale and is likely to require a considerable amount of time to prepare, review, negotiate and finalise. Its principal terms are:
- sale and purchase: sale and purchase obligations and actions which will take place on completion of the transaction
- purchase price: the price is and how it will be calculated (particularly for earnout consideration) and paid
- warranties: warranties from the seller to the buyer in relation to the company and its business, breach of which may give rise to a legal claim against the seller
- liability limitations: limitations on the potential liability of the seller under the warranties
- restrictive covenants: undertakings from the seller not to complete with the business, or to solicit clients, suppliers or employees of the company, for an agreed period following completion
- disclosure letter: a letter from the seller to the buyer which sets out specific exceptions to the warranties contained in the SPA
- ancillary transaction documents: documents to be entered into and delivered at completion of the transaction, which often include:
- resolutions of the directors of the company being sold, to approve the transfer of the shares being sold and other administrative matters
- resignation letter(s) from the director(s) of the company being sold
- power of attorney from the seller in favour of the buyer to enable the buyer to exercise the rights attaching to the shares being sold pending their registration in the name of the buyer in the company’s register of members
The share purchase agreement will usually be prepared by the buyer and it is important for the seller to review it to ensure that it is on acceptable terms which are usual for similar transactions.
In a share sale, the new owner assumes ownership of the company along with all its assets and liabilities, allowing the business to continue operating with minimal disruption.
Legal documents needed for selling a business or assets
An asset sale can be a more lengthy and complicated transaction process. It will usually be the chosen structure where a company business is in financial difficulty, as a buyer will want to avoid taking on all of the known and contingent liabilities of the company.
For an asset sale transaction, it is important to identify clearly:
- which property and assets of the business are being sold and the legal process for the transfer of their ownership
- which liabilities of the business will be taken on and assumed by the buyer
- which contracts of the business will be assigned to the buyer and how this will need to be documented
- whether any third party consents need to be obtained for the transfer of the identified property, assets or contracts
An asset sale, often complex and chosen when a business faces financial difficulty, involves clearly identifying which assets liabilities and contracts are being transferred. The main document is the APA with additional paperwork needed for specific asset transfers. Third-party consents may also be required.
The documents required for an asset sale are broadly similar in general nature to the documents for a share sale. The principal differences are:
- the main sale document is an asset purchase agreement (also known as an APA or business purchase agreement) rather than a share purchase agreement
- completion of the transaction may require additional documents to transfer the assets and property being sold, for example an assignment of trade marks and assignments of contracts
