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Understanding contracts when selling a business

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What contracts and agreements are involved during a business sale?

As a business seller, you will be required to prepare formal documentation that is both legally and non-legally binding throughout different stages of the business sale process, from a Heads of Terms Agreement, to a Final Purchase Agreement. When selling a business, a series of agreements and contracts will be drawn up by your solicitor to summarise the basis of the deal and track ongoing negotiations, such as pre-conditions, and payments terms.

Your business transfer agent will navigate you throughout any negotiations to ensure that the sale is structured in a tax-efficient manner, with no costly mistakes likely to arise in the future. If you appoint a business transfer agent or business broker, they will handle each stage of the business sale journey, from deal negotiations, due diligence checks, to sale completion.

Prepare to sell your business

The first stage of the business sale journey is to prepare marketing collateral to advertise your business for sale, find a suitable buyer, and enlist a reputable business broker to apply their expertise.

Your first serious interaction with a contract will likely be when you appoint a business broker. While some business transfer agents tie in customers through a compulsory upfront payment, we will never ask for payment until we secure a buyer for your business.

Sales Memorandum - A memorandum of sale will be produced and distributed to potential buyers and relevant intermediaries, such as broker networks and online marketplaces. The document will feature a complete business profile, background information, imagery, and essential sale details.

Non-Disclosure Agreement - All Interested parties may be required to sign a non-disclosure agreement prior to any discussions or information being disclosed to protect the identity of the business.

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Secure a business buyer

All interested parties will be required to submit an offer in writing to register their interest, financial commitment and to aid the elimination process if there is more than one interested party. The buying party will be confirmed once solicitors have been appointed and primary due diligence checks confirm that the buyer can afford the purchase and their interest is genuine.

Heads of Terms - A preliminary agreement will be signed, also known as Heads of Terms or a letter of intent while the finer details of a final contract are discussed. A Heads of Terms agreement is not legally binding, however, sets out the key components of the sale while a final legal contract is worked towards.

Heads of Terms typically include:

-          Details of the business seller and business buyer

-          Sale details, such as deal structure, completion date

-          Pre-conditions, such as a non-compete or exclusivity clause

-          Payment terms, such as seller financing or future conditional payments through an earn-out agreement

Complete the sale of your business

A final contract will be carefully composed by a solicitor as it is legally binding and must enclose every notable agreement made during sale negotiations, including general terms. The final contract will confirm the business transfer and create a legal tie between both parties. In the event that the sale falls through, the final contract will also clearly state who will be responsible for company liabilities.

A final business sale contract will include a detailed breakdown of the sale, such as pre-conditions, payment terms, warranties, indemnities, liabilities and the transfer of employment and commercial contracts.

Following the sale, general housekeeping tasks must be completed by the seller, such as informing HMRC and Companies House. The handover phase will now come into effect, as discussed, and agreed upon by both parties.  

The Selling My Business team are leading business brokers and business valuers with national business sales experience. For more information on how to sell a business and business sale contracts, get in touch to arrange a free business consultation.

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