Gerallt Jones says that brokers considering a sale should start putting their house in order as soon as possible
Despite the much talked about credit crunch, a recent Insurance Times article announced that as many as one in five broker firms expects to merge or close in 2008. For those firms, the preparation for a sale cannot start too early.
A well-advised buyer will want to know everything there is to know about the target broker. Through a due diligence process, it will conduct a thorough review of the broker’s business, both current and historical, with a view to identifying potential pitfalls before committing to buy.
If you are contemplating a sale, you should consider as early as possible what issues might be stumbling blocks for a buyer and whether these could be dealt with in advance of a sale.
For example: are there unresolved regulatory, tax or accounting issues? Are third party consents required for a sale? Are there any potential claims or regulatory investigations involving the business?
If a major issue is unearthed after the sale process has started, this is likely to result in increased costs and may lead to a price reduction, or even to the transaction being abandoned.
Clearly, therefore, the sooner any issues are identified and dealt with the better. In addition, this is the time to ensure that the business’s papers and other information are in good order so that they can be made available to a buyer quickly when the process starts.
Selling a business is a team effort and ensuring the right people are involved and are committed is critical. Who are the key employees that will need to remain in the business after it is sold and are they likely to be supportive? Are there key employees who may see a sale as an opportunity to move on? If so, how will they be incentivised to participate fully in the sale process?
Equally as important as the internal team are the advisers that will work with you throughout the sale process.
Accounting, tax, legal and, depending on the size and complexity of the transaction, corporate finance advisers should be engaged early to assist in the structuring of the transaction, to guide you through the process and to protect your position. They will be able to give expert guidance on fundamental issues, such as the tax consequences of alternative structures and whether the sale should be of shares or of assets.
Once a prospective buyer has been found, the first step should be the signature of a confidentiality or non-disclosure agreement. No sensitive information should be disclosed until the recipient has committed to keeping it confidential.
It is sensible, when the headline terms of a transaction (including the price) have been agreed in principle, for these to be reflected in a document signed by the seller and buyer, whether called heads of terms, a memorandum of understanding, a letter of intent or an offer letter.
This document will not be legally binding (except as to matters such as costs) and will make it clear that completion of the transaction is subject to various conditions, most notably the results of the buyer’s due diligence investigations.
It will, however, set out the basis on which the parties are prepared to proceed and should bring to the table fundamental issues that might otherwise arise later in the transaction, such as timing and the main terms of any earn-out.
The buyer may well ask at this stage for a legally-binding commitment from the seller to deal exclusively with them: whether and when to grant exclusivity and on what terms (for example, should there be a deposit or costs indemnity) will be matters the seller will need to consider with its advisers. The buyer’s advisers will produce lengthy questionnaires asking for information on the business.
The responses to these will be put together by the seller’s advisers working closely with the team within the business. Supporting documents will also need to be supplied to the buyer, whether by having them available in a data room or sending them directly.
The key document will be the sale and purchase agreement, which is usually lengthy and heavily negotiated. As well as containing the terms on which the business will be sold, this will include extensive warranties under which the sellers confirm the accuracy of certain facts relating to the business.
If these prove to be incorrect, the buyer will be entitled to bring an action against the seller, subject to limitations included in the agreement. The warranties will also be subject to matters included in the disclosure letter, a document prepared by the seller and its lawyers setting out details of any issues within the business that, if not disclosed, would result in the warranties being breached.
The buyer is also likely to seek indemnities, under which the seller agrees to reimburse the buyer for losses resulting from specified events such as tax liabilities and issues arising from the due diligence process.
Agreement will need to be reached on whether or not completion of the transaction, when the business is transferred and the consideration is paid, happens simultaneously with the signature of the sale and purchase agreement, or will take place only after certain conditions have been met.
A buyer is likely to prefer a conditional agreement under which completion takes place only when all regulatory approvals and key third party consents have been obtained.
While the sale of a business can be very stressful and time consuming, early preparation and the involvement of a strong team should ensure that the process runs as smoothly as possible.
Gerallt Jones is head of corporate at Hugh James Solicitors