What Should You Consider When Selling the Assets of Your Business?
If you are preparing to sell your business and its assets, below are some of the key matters to consider.
What Is Due Diligence and How Should You Prepare for It When Selling Business Assets?
Due diligence is something a prospective buyer is likely to want to carry out, so you should prepare for this by identifying the advisers or individuals within your business who have sufficient knowledge of the business and can assist with responding to due diligence queries.
A buyer may request large amounts of information about your business, which will need to be supported by appropriate documentation. This process can be time-consuming. Collating information and documentation in advance can help the transaction progress efficiently and may also allow you to identify any aspects of the business that a prospective buyer may have concerns about, enabling you to prepare suitable explanations.
The main areas of due diligence may include:
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Assets of the business – a buyer will want a schedule of the assets being sold and confirmation that these are in a saleable condition and, where relevant, have been properly and regularly maintained. Evidence to support this should be available.
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Contracts of the business – be prepared to provide copies of executed contracts with customers and suppliers.
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Financial due diligence – consult with your accountant to prepare the financial information in a readily accessible format and to identify any areas where a prospective buyer may require further information.
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Employees – you should be able to provide details of employees who may transfer to the buyer as part of the transaction, including their role, salary, length of service and signed contracts.
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Property – ensure that title documentation or lease details are readily available. If the property is leased, consider when it will be appropriate to notify the landlord of a potential assignment or the grant of a new lease.
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Compliance and consents – consider whether there are any industry-specific consents required for the business to operate, whether these can be assigned as part of the transaction, and ensure these are readily available.
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Intellectual property rights – identify any intellectual property rights required for the operation of the business that will form part of the sale and consider how these will be transferred.
Due diligence documents are usually uploaded to a data room, which is typically set up by the seller or their solicitors. The buyer and their advisers are then granted access to review the documents.
What Pre-Transaction Agreements Might Be Required in an Asset Sale?
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Confidentiality agreements – if, following your internal due diligence review, you decide that providing certain information to a prospective buyer would be too risky (for example, trade secrets or customer lists), you may wish to enter into a confidentiality agreement (also known as a non-disclosure agreement or NDA). This ensures that the buyer cannot disclose confidential information to third parties and can only use it for the purposes of the transaction.
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Exclusivity agreements – some buyers may request an exclusivity agreement to avoid incurring unnecessary legal fees and due diligence costs if there is a risk that the seller may transact with another buyer. An exclusivity agreement confirms that you will not sell the business and assets to another buyer within a specified period.
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Heads of terms – heads of terms can be useful as they require the parties to agree on the key commercial terms at the outset of the transaction. This may help prevent extensive renegotiation later in the process, after significant costs have already been incurred. It is common for an exclusivity clause to be included in the heads of terms, removing the need for a separate exclusivity agreement.
What Documents Are Required for an Asset Purchase Agreement and Who Is Responsible for Drafting Them?
The main documents required for an asset sale may include:
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Asset purchase agreement – the principal document setting out the assets being purchased and the terms on which they are being acquired.
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Disclosure letter – a letter setting out disclosures against the warranties contained in the asset purchase agreement, making the buyer aware of specific circumstances prior to completion.
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Board minutes and company approvals – documentation authorising the transaction.
Typically, the buyer prepares the initial draft of the asset purchase agreement, as they will wish to propose terms that are favourable to them. However, if the buyer has not instructed solicitors, the seller’s solicitors may prepare the first draft, although this approach may increase the seller’s legal costs.
The seller is responsible for preparing the disclosure letter and any required board minutes or company approvals.
Additional documents may also be required depending on the nature of the transaction, such as documents to transfer property or intellectual property rights to the buyer.
When Should You Seek Legal and Financial Advice When Selling Business Assets?
You should seek professional advice as early as possible to ensure you understand the optimal structure for the transaction and to identify any potential risks.
We can assist with all legal aspects of an asset sale, from reviewing pre-transaction documents through to drafting or reviewing the asset purchase agreement and supporting you through to completion.
You should also consult with your accountants so they can advise on the financial aspects of the transaction. Not all accountants specialise in transactional work, so you should confirm whether your current accountant has the relevant experience or consider instructing a specialist corporate finance adviser.
If you are considering selling the assets of your business, early legal advice can help you structure the transaction effectively and minimise risk. Our corporate team has extensive experience advising on asset sales and can support you at every stage of the process, from initial planning through to completion. If you would like to discuss your proposed transaction, please contact us to arrange an initial consultation.
