FAMILY BUSINESS LAW
Selling the family silver
by Chris Guy Head of Corporate , Mills Selig
F
amily businesses , almost by definition , are businesses that span generations in terms of ownership and management . There often comes a time , however , when passing the business on to the next generation is not an option . At such times , selling to a third party , including nonfamily managers , may be the solution .
The decision to sell your family business should not be taken lightly .
Selling a business that has been in your family for more than one generation can be extremely challenging . Emotional attachment to your business can play a big role in both when and how you want to sell it .
You should also never underestimate the stamina and resilience required to continue running your family business whilst at the same time engaging in the sale process .
So what is typically involved when selling a family business or indeed any business ? What are the key stages to selling your family business from a legal perspective ?
1 . Presale preparation It is important to try and achieve buyin from all family stakeholders on the decision to sell . If some family members are not on the same page you run the risk of the sale process being delayed or even derailed .
The next step is then taking financial and legal advice at an early stage on issues such as valuation and price expectations , how you approach prospective buyers , presale legal audits and protecting confidential and commercially sensitive information .
Make your advisors part of the team – they can shoulder alot of the burden if you let them .
2 . Preliminary agreements
Once you engage with a potential buyer you should ensure that the buyer enters into a confidentiality agreement or nondisclosure agreement – this should be agreed and signed before any commercially sensitive information is provided to the buyer .
The parties will then usually sign a Heads of Terms ( sometimes referred to as a letter of intent or memorandum of understanding ) following the initial period of negotiation .
The Heads of Terms are not usually legally binding ( except for elements like confidentiality and exclusivity ) but they should clearly capture the commercial deal agreed .
This will help negotiation of the deal at the later stages of the transaction as both parties will find it hard to deviate from these terms without good reason .
3 . Due diligence Due diligence is the process by which a buyer will investigate financial , legal and commercial aspects of your business to ensure it has enough information to understand risk and justify price before finally deciding to proceed with the sale .
Many first time sellers find the due diligence exercise far more time consuming than they imagined .
To try and ensure a smooth due diligence process you should engage with advisors at an early stage to ensure that documents and records are all in order and also to identify and remedy any potential issues in the business that may be the subject of particular scrutiny as part of the due diligence process .
4 . Negotiation of legal documents and Completion
Once the Heads of Terms are concluded , the legal teams of both parties will draft and negotiate the legal documents required to fully document the terms of the sale of your family business .
The key document will be the sale and purchase agreement whether you are selling the shares in the business or its assets .
While a typical sale and purchase agreement may run to 100 pages or more , the key provisions of a sale and purchase agreement actually transferring assets or shares to the buyer may only cover a small number of those pages .
The rest of the agreement will be about apportioning risk between buyer and seller on issues such as :
• Price adjustments if key valuation assumptions on which price has been based prove incorrect .
• If there is a time lapse between exchange and completion , in what ( if any ) circumstances can the buyer still withdraw from the deal after signing .
• Is some of the price dependent on future performance ( earnouts )?
• Warranties – contractual statements about business ( for instance " there are no employee claims ") which can give rise to a contractual damages claim if untrue . The lawyers will also draft and negotiate other key transaction documents such as the disclosure letter ( by which the sellers will make disclosures about the business and so limit their liability under the warranties set out in the sale and purchase agreement ) and also any service agreements to deal with the roles of family members who will continue to be employed in the business postsale .
Completion is the point at which the sale is legally concluded with shares or assets transferring to the buyer in consideration of cash , shares or other assets being paid to the sellers . It is common for some portion of the consideration to be deferred and paid following Completion , often in the form of an earnout which ties the amount of consideration paid to the performance of the business .
Sellers should also be aware that following Completion there will be a period when there is a risk of clawback as a result of a breach of warranty claim – this period is typically two years for general warranties and up to seven years for tax warranties .
Once you have completed that sale of your family business you will need to turn to the next chapter in your life and it makes sense to prepare for this well in advance . You will undoubtedly find a hole in your life – many clients describe the feeling as very strange and it will take time to get used to . From a practical perspective you will need to consider and take steps to protect the wealth you have created from the sale and tax advice will also be important .
At Mills Selig we regard guiding a family through the process as key to our role when acting on any sale or acquisition of a family business .
MOREINFORMATION
For further assistance on selling your family business or buying a business , please contact Chris Guy on + 44 ( 0 ) 28 9024 3878 or at chris . guy @ millsselig . com .
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