Special Report: Selling a Business with Trethowans

While many independent builders’ merchants continue to be handed down through the generations, for some firms there comes a time when the moment is right to sell up. As buying or selling a company comes with many challenges, Jamie Earley, Corporate Senior Associate at Trethowans, shares his top five legal tips for a smooth, successful sale.

1: Get the right advisors

From the outset, sellers need advisors who give them the best chance of achieving the right price. In addition to legal advisors, this is likely to be a mix of a specialist consultant or corporate finance advisor, and accountants.

These advisors will be key in advising on the financial aspects of the sale, including those in the acquisition agreement. Commonly, there will be some form of completion accounts produced after completion to determine the ultimate sale price. If this isn’t done correctly then sellers could find themselves paying money back, or not receiving what they are expecting.

2: Insurance

Sellers are expected to provide contractual reassurance to any buyer about the business. These statements, known as warranties, will cover the whole of the business including matters relating to compliance with laws, employment and condition of assets. The buyer usually has somewhere between 12 and 24 months to bring a claim.

Many sellers (particularly those who are not involved in the day to day running of the business) look to insure against this risk. Attractive as this sounds, there are two key initial points to consider:

• Cost: premiums are typically around 1% of the purchase price. The issue is that there is usually a minimum premium that is likely to be in the region of £30,000 or more, which will make it cost prohibitive on smaller transactions.
• Timing: the process needs to be managed from the outset of the transaction. This type of policy is not as simple as taking out other forms of insurance related to your business.

The above said, generally, warranty claims are rare and insurance is seldom taken out on sales in this sector based on our experience.

3: Contractual paperwork

This is a key area to get in order. The business may not have ‘formal’ contracts with suppliers, but would usually at least have been issued with terms and conditions. Businesses with equipment finance will likely have formal hire, lease or similar agreements and terms and conditions.

Having complete and up to date documentation in place in respect of all aspects of the business prior to commencing a transaction sends a clear message to a buyer about the running of the business. Contractual paperwork will also form part of the subject matter for the warranties (see above).

4: Regulatory

Due to the nature of the business, health and safety is often a key focus for buyers. However, no buyer will expect any business to be perfect and would probably rather see robust procedures, with a track record of minor issues that have been resolved quickly, rather than a purportedly clear history. So, sellers should consider getting a health and safety audit themselves before agreeing to sell.

Since the General Data Protection Regulation (GDPR) was implemented in 2018, buyers have been paying closer attention to data protection. Whilst it’s easy to think this wouldn’t have much application to builders’ merchants, this legislation does (unfortunately) impact all businesses — sellers may have a customer database or mailing list for example.

Given the level of potential fines, most buyers will expect the seller to indemnify them (hold them harmless) for any issues associated with this. This loss would not ordinarily be covered by the insurance referred to above.

5: Who are you selling to?

Sellers should carry out due diligence on buyers. This is particularly important if any of the purchase price is to be paid after completion. However, there are also slightly more subtle but equally important issues to consider. For example, some sellers can be intimidated by a sale to a much larger entity. Whilst worthy of consideration, there are some positives:

• Experience: a serial acquirer will have gone through the process before, which should make it smoother.
• Warranty claims: linked to the earlier point, a serial acquirer, whilst relying on the warranties, is less likely to have the appetite to bring a warranty claim (unless it is sufficiently serious or fraud is involved) as it could affect its reputation and put off any other future sellers. In the same vein, sellers should consider asking the buyer if they can speak to any other sellers they have acquired from and ask the buyer directly about warranty claims on past transactions.

Whilst on rare occasions a sales will come about completely unsolicited — an “offer one simply couldn’t refuse” — generally the exit is planned, giving sellers enough time to prepare for sale by taking the steps above.