Preparing for an exit: a quick guide for business owners

Business owners sell for many reasons: retirement, a desire to step back, to de-risk personal wealth or to realise liquidity after years of building value. Others are more strategic: an owner may want to exit to focus on a new venture or bring in an investor to help the business scale.

Common exit routes include: 

• a trade sale to another company (often in the same sector) looking to grow by acquisition and typically focused on synergies and strategic benefits.
• a sale to a private equity (PE) fund that acquires a substantial minority or majority stake, with management often staying on and reinvesting alongside the fund. PE buyers tend to focus more on financials and projected growth.
• a sale to an employee ownership trust, where a trust becomes the controlling shareholder for the benefit of employees.
• an initial public offering, involving the listing of the company’s shares on a stock exchange, which can be a viable option for larger businesses with strong governance and predictable performance.

The remainder of this article focuses on trade sales, as the most common exit route for business owners. 

Timelines vary, but a trade sale can take up to a year to complete, depending on the level of preparation, complexity and other factors.

Deal team 

An owner will need to decide on the internal deal team responsible for running the process. Typically, this might include the chief executive officer, the chief financial officer and/or the general counsel, who will periodically report to the board of directors. External advisers will support the internal team, usually including:

• corporate finance (CF) advisers who will find potential buyers, value and market the business, help the seller assess bids and manage the process.
• lawyers who will draft and negotiate the transaction documents, manage the legal workstreams (including due diligence and disclosure) and advise on any legal issues that arise during the deal (including in areas such as IP, employment, pensions, data protection and tax).
• accountants and tax advisers who can assist with financial and tax due diligence, financial statements, tax structuring and advice, the accounting aspects of any price adjustment mechanism and the financial and accounting provisions in the acquisition agreement.

Get your house in order 

In a business exit, the buyer will undertake a comprehensive review of all financial, tax and legal aspects of the business. A prudent seller will begin preparing for this early by compiling all key financial and legal information and putting it into a secure, online virtual data room (VDR). This will form the basis for any vendor due diligence and buyer due diligence (see below).

Auction or bilateral 

Where there are likely to be multiple potential buyers, the seller’s CF advisers might run an auction process. This allows the seller to leverage competitive tension, potentially achieve a higher price and exercise more control over the timeline. However, auctions are more demanding and expensive, particularly when negotiating with multiple parties. A bilateral transaction (with a single buyer) will usually be cheaper and less time-pressured, but the seller will have less authority to leverage competing bids. 

Vendor due diligence 

Many sellers choose to undertake vendor due diligence (VDD) prior to the sale, particularly in auction processes. VDD often covers legal, financial and tax matters and has various advantages, including:

• enabling the seller to identify, and potentially remediate, any issues prior to the sale (and avoid the buyer discovering them later and seeking indemnity protection, a price reduction or pulling out of the deal).
• front loading the due diligence process and giving the seller more control over the transaction timeline.
• helping the seller make a head start on preparing the VDR and the disclosure process (see below). 

The seller’s lawyers will typically produce a legal VDD report outlining any issues identified, the level of risk and recommended remediation steps, which can then be provided to prospective buyer(s).

Transaction structuring 

A trade sale is typically structured as either a share sale or an asset sale. In a share sale, the buyer acquires the shares in the company (including all of its liabilities). In an asset sale, the buyer purchases specified assets (e.g. contracts, equipment, IP and goodwill) and may leave behind unwanted liabilities. Asset sales can be more complex (as each asset must be individually transferred) and less tax efficient for sellers. A prudent seller will take tax advice on transaction structure as early as possible. 

Buyer due diligence 

The buyer will undertake due diligence on the target business covering legal, financial and tax matters, and may also look at technology, cyber security, regulatory compliance and other areas. The legal due diligence will cover all key areas of the business, including share ownership, corporate structure, commercial contracts, IP, data protection, employees, pensions, real estate, financial arrangements, regulatory and compliance matters. 

Transaction consents 

The parties should identify early any third-party consents required for the transaction. For example, regulatory approvals may be required in respect of merger control, national security or, where the business operates in a regulated sector, from other regulators (e.g. the Financial Conduct Authority). There may also be contractual “change of control” consents or notifications required under finance documents, leases, licences and customer or supplier contracts. It is usually worth creating a “consents map” early and building it into the timetable. 

Deal execution 

The main contract for a trade sale is usually a sale and purchase agreement (SPA) which contains the terms of the deal, including calculation of the price, timing of payment, any conditions to completion and any seller restrictive covenants. The SPA will also include warranties, which are statements about the business, covering areas including accounts, key contracts, employees, disputes, compliance and tax. If a warranty turns out to be untrue and the buyer suffers a loss, the buyer may have a contractual claim (so these clauses, and related seller limitations, are heavily negotiated). The seller will typically disclose any known exceptions to the warranties in a disclosure letter. The SPA will also usually include a tax covenant under which the seller will indemnify the buyer for any pre-completion tax liabilities of the company. There will be ancillary documents too (e.g. IP transfers, employment contracts and transitional services arrangements), which will be requested by a buyer on a case-by-case basis, often due to specific issues identified during due diligence. 

Towards the end of the process, the parties will exchange, when the SPA is signed. Sometimes completion happens simultaneously with signing. In other cases, there is a gap while any conditions (e.g. consents) are satisfied. Following completion, there will be further actions, including filings at Companies House, register updates and implementing agreed handover or transition arrangements.

About TLT 

TLT LLP is a full-service national law firm with around 700 lawyers across the UK. The firm’s corporate team is consistently ranked by the leading legal directories and regularly supports entrepreneurs on trade sales, PE investments, management buy-outs and employee ownership trusts. 

Adam Kuan

Telephone: +44 333 006 0025, email: Adam.Kuan@TLT.com 

Joe Gallon 

Telephone: +44 333 006 1093, email: Joe.Gallon@TLT.com