Preparing your business for sale: tips for sellers of private limited companies


If you are considering selling a business, or if it is possible you may do so in the remote future, this note is intended for you. It is a short introduction to the topic in layman’s terms, including tips on a variety of relevant matters. I have done my best to keep things clear and simple, as I would do if I were advising you.

You will need legal advice relating to the specific circumstances of any potential deal, and on your long term strategy in contemplation of selling your business generally. You should not rely on this very general note as advice. However, while it is not tailored for you or exhaustive, it should provide a useful overview of some matters relevant ahead of the sale of a company as this usually occurs in the UK, under English law. I have focused especially on considerations relevant to the sale of a company’s shares. It is also possible for a company to sell its assets; following the guidance below should maximise the range of possible options.

For particular types of sale, such as management buyouts, the guidance in this note may apply in broad outline but with additional considerations or a difference of emphasis. I will be happy to discuss these matters, informally and without charging, if you are not seeking formal advice but merely wish to explore.

1. Grow your business in a sellable structure.

The more straightforward your business and its ownership structure is, the easier it will be to sell – thereby increasing the likelihood of a successful sale and lower legal and transaction costs. Growing your business, whether as a result of joint ventures, bolt-on acquisitions or otherwise, across two or more separate legal entities, possibly with separate ownership, might well address short to medium term needs and bring commercial benefits, but is likely to lead to increased complexity when it comes to a sale. Arrangements whereby staff are contracted-in or where material intellectual property is licensed to the trading company by shareholders or other group companies, whether for tax or other reasons, can also give rise to challenges. Complex structures such as the above are likely to make a sale more complicated and therefore more expensive to deliver and can also lead to disagreement among sellers over the allocation of the price and/or responsibility for warranties and indemnities in the sale and purchase agreement. At worst, they can put off a buyer entirely or lead to attempts by the buyer to renegotiate the purchase price.

If your business assets are already spread across more than one entity and you envisage a future sale, you should consider and take advice on carrying out a business reorganisation well ahead of the sale, both to facilitate the future sale and minimise potential adverse tax consequences.

2. If you expand your shareholder base, ensure that you will be able to force through a sale.

Many owner-managed businesses are wholly-owned by the founder or by the founder and his or her spouse. Often, one or more employees hold shares or have been granted share options exercisable before or on a sale. As they grow, companies may have taken on equity investment and so have third party investor shareholders. The shareholder base may, after multiple investment rounds, include family and friends, angel investors and venture capital or similar funds. It is important to keep on top of and understand what rights (if any) the founder and/or majority shareholders have, under the articles of association and any subscription, investment or shareholders agreements and under any share option agreements or rules, to force through a sale and effectively make the minority sell their shares to a chosen buyer. Ideally of course it is likely to be preferable to avoid a forced sale, but it greatly improves the majority’s negotiating position, both in “internal” discussions with other shareholders and in discussions with potential buyers, if this is option is available, even if only used as a last resort.

The more clearly and tightly those provisions (known as drag along rights) are drafted, the better the majority’s ability to rely on them to effect a sale of the entire issued share capital, which is what most buyers will insist upon. Ideally, the drag along rights will stand up to scrutiny and persuade minority shareholders to sign up to the sale documentation. If, however, there are any loopholes, such as the absence of a power of attorney provision under which the minority shareholders give the directors/majority shareholder the right to sign sale documentation on their behalf, they might be seized upon by disgruntled minorities and their resulting bargaining power could become an unwelcome and expensive distraction at the point of sale.

The time to review any drag along provisions and any comparable sale-related provisions in any relevant joint venture documentation is well ahead of a sale when the bargaining position of the majority (or the company) to negotiate such changes is likely to be greater. Better still, of course, is to ensure that appropriate provisions are included in articles of association, investment or shareholders agreement(s) and any share option or joint venture documentation, at the time when shares are issued, options are granted or any joint venture is entered into.

3. Maintain your contract, company books and financial records.

One of the first things a potential buyer is likely to do is to carry out a legal, financial/tax investigation into your business. Preparing and maintaining an organised, up to date and easily accessed set of key documents and records relating to all areas of your business (including financial information) will save you time when you need to be focusing on sale negotiations while also running your business, and will also send the right message to potential buyers. This will also enable you to identify anything that might not have been done, kept or maintained, such as omissions in the company’s statutory registers or Companies House filings, unissued share certificates, unsigned shareholders agreements and missing IP assignments from employees or third party contracts. It is advisable to take full legal advice on any matters relating to your company’s share capital and dividend distributions as invalidly carried out allotments or repurchases of shares, reductions of share capital and distributions can cause serious concerns for buyers and their advisers and lead to (for instance) the giving of indemnities or requests from buyers to retain parts of the purchase price as a protective mechanism.

4. Consider when would be a good time to sell and manage the process accordingly.

While potential buyers will naturally want your business to have demonstrated a healthy and, ideally, growing profit history, they may also, perhaps less reasonably, focus on the company’s performance during the deal negotiation period. This can sometimes lead to price reductions. Conversely, marketing your business for sale (if that is what you plan to do) ahead of potential growth opportunities might increase the price offered. You should therefore carefully consider, having regard to the profit trends of your business, the opportunities presented by the market in which you operate and the time it might take to compete the sale process, when would be a good time to market your business for sale and to complete. Alongside this, consider whether you have in place a senior management team ready and able to continue to deliver results for the buyer and be aware that a buyer might require you to stay on in the business in some capacity for a period, whether as a consultant or an employee and whether full-time or part-time (all points for negotiation). This is usually to maintain goodwill and ensure a successful handover of customers and preservation of contracts.

5. In the run-up to a sale, consider the implications of any long term commitments you enter.

If a buyer is not keen to take over particular long term commitments, such as supply contracts, vehicle financing arrangements or a property lease, those contracts and arrangements might end up having to be extracted from the business or terminated, with the financial consequences often being met by the sellers. Where possible, therefore, consideration should therefore be given to whether alternative arrangements can be agreed with relevant third parties, such as a shorter term lease or supply agreement. Think twice also about potentially unnecessary capital expenditure in relation to things that a buyer might not value or require or might want to replace, as this is likely to reduce your ultimate sale proceeds.

6. Take professional advice early, and refresh it regularly.

As I hope this note has shown, it is important to prepare well in advance of any potential sale and to ensure that, as the time draws near, you have a well-informed strategy to optimise your position.

With this in mind, it is sensible to take legal and other professional advice (e.g. tax) early on, to keep your advisers informed of your plans and to seek their advice ahead of any potentially relevant structural or strategic changes in your business. I will be delighted to have an informal conversation at any time if you would like to explore the possibility of taking my advice, whether on any of the matters described in this note or otherwise.

This article is not legal advice, which it may be sensible to obtain before you take any decisions or actions in the areas covered. Please do contact me if you would like an initial discussion of your situation.

Jonathan Poole
  • Corporate
  • Commercial