Deals: Weighing up ways to prepare for asset sale
In a business and asset sale, the buyer acquires the business and assets – both tangible andintangible – together with select liabilities of a company. This is as opposed to a share sale, where the buyer acquires the shares of the company that owns the business and assets.
Here are five steps to take to prepare your business for an asset sale...
Organisation
The sale of a company can, depending on the size of the transaction, take several months with numerous elements that will need to be considered.
The buyer will require sight of certain documents and records before finalising any purchase. It is therefore in your best interests to ensure your record keeping is in order early on to assist the due diligence process.
Appointing experienced business, legal and tax professional advisors is the most prudent way to ensure that the sales process runs efficiently.
Valuation
Corporate finance advisors should be consulted when you set about valuing your business and assets. There are many different factors that must be considered in the valuation, for example, the ability to novate key customer and supplier contracts to the buyer.
Depending on the circumstances of the seller and/or business, there may be ways to make changes to the business first to increase its potential value. These changes may occur over a relatively long period of time prior to the sale or entering into any preliminary agreements.
Regardless of any changes, it is imperative that the right time to sell is identified.
Confidentiality
The importance of confidentiality should not be underestimated, particularly at the beginning of the sales process. Disclosing any details of the transaction too early can have unintended adverse effects.
For example, if a proposed sale is disclosed to the affected employees, this may create concerns regarding their job security, which could potentially have a detrimental impact on the deal process.
Potential buyers should be asked to sign confidentiality agreements – also known as non-disclosure agreements –before any information is disclosed to protect any sensitive information.
Deal structure/heads of terms
It is a good idea to consider the structure of the deal early on. One of the first things that is likely to be discussed with your advisors is whether a business and asset sale, rather than a share sale, is right for you.
After this has been established, there are a number of different issues that need to be considered. It is common for the buyer and seller to enter into a form of preliminary agreement, often referred to as “heads of terms”.
These usually set out the basis of the offer from the buyer as well as some of the key legal terms to be included in the legal documentation which will ultimately be required for the sale, for example, warranty cover, caps on liability, how employees are to be dealt with.
Most of the heads of terms provisions will not be legally binding but are intended to give the parties some comfort around the structure of the deal before moving to the next stage.
It is important that the document is clearly drafted to ensure both parties have a clear understanding of the outline terms of the deal, and to reduce the risk of the buyer trying to renegotiate key aspects at a later date.
Consents
Buyers, when considering the purchase of your business and assets, will be wary of any obstacles to obtaining the third-party consents necessary for them to take over ownership.
A prudent seller will explore whether the consents within material agreements are obtainable, so that issues do not arise unexpectedly during the diligence process. These consents can include:
Lenders – if the seller has secured loans with a bank, its consent will be required for the sale of any assets covered by their security.
Landlords – if your business operates out of a leased premises and the buyer wishes to continue to use them, the lease will need to be assigned to the buyer and this will (typically) require the consent of the landlord.
Customers and suppliers – if the sale of your business includes the assignation/novation of certain key agreements (both customer and supplier) to the buyer, the terms of those agreements will need to be checked thoroughly to establish what can and cannot be done without the consent of the relevant contractual third party.