Demystifying The Jargon Associated With Selling Your Business

To think about selling your business can be quite daunting for some and it isn’t helped by the amount of jargon that is used during the process. Below is a glossary of some of the terms which you may come across.

There will no doubt be others but don’t be afraid of asking for help from one of the members of our Corporate Team. You are not expected to know everything.

An IM is an Information Memorandum. It is a short summary of the business that is being sold and is used to market the business for sale.

Share Sale/Business and Assets Sale
Businesses can be sold in one of two ways. There can be a business and assets sale, which means that the Company sells its business and assets to the Buyer and after the sale, the Company still remains in existence and the proceeds of the sale of the business and assets either stay with the Company or are distributed to the Shareholders of the Company.
A share sale is where the Shareholders sell the shares that they own in the Company to the Buyer. This is often the preferred route if you are a Seller, as there are often some significant tax savings in how the proceeds of sale are treated in the hands of the Seller.

Most business sales (transactions) start with Heads of Terms (HOT) or a Letter of Intent or Letter of Interest (LOI). Whatever the term used, this document is a summary of the parties to the transaction, the price being paid for the business and assets or shares, the terms upon which that price is to be paid and any other relevant terms for the transaction. The intention of this document is to agree the commercial terms of the deal before starting to have the legal documents drafted. The HOT/LOI is not intended to be legally binding apart from any exclusivity period it may contain. An exclusivity period would mean that you would not be able to negotiate a deal for the sale of the business with any other potential Buyer during the period you are allowing the current potential Buyer to take a look at the business.

Consideration/Deferred/Earn Out
The consideration for the sale of business and assets or shares of the Company is the aggregate price that is being paid by the Buyer to the Sellers. It can be structured in a number of different ways. Ideally, you, as the Seller, would want 100% of the consideration being paid in cash on completion. Alternative structures involve a part payment of cash on completion with the balance being paid over a period of time. This latter part of the payment is called the “deferred”. The balance that is due may or may not attract interest and may or may not be secured. The consideration and the deferred can be in the form of cash or loan instruments or shares in another company (typically shares in the Buyer).

The consideration for the sale can also be a mixture of an amount of cash on completion and the balance in the form of an earn out. An earn out is where the price that is going to be paid for the business will be determined by the performance of the business being acquired over a period, starting from completion. As a percentage of the total consideration to be paid, the earn out should be kept to a minimum, if you are the Seller. The performance criteria can be based on gross or net earnings for example with a specific customer or just generally on the business’ performance during this period. Earn Out structures favour the Buyer more than the Seller.

An escrow or retention is where the Buyer holds back some of the consideration which is payable on the sale. The monies held back are usually held by an escrow agent and the date and the terms upon which they are released is set out by agreement between the Buyer and the Seller and the escrow agent. Escrow/Retentions are usually used where there is a potential risk for the Buyer in the acquisition and the Buyer sees this as some form of security in case something goes wrong after they have acquired the business. If the risk the Buyer perceives might happen, happens, the Buyer has an automatic right to reduce the price paid, by taking back the monies held in escrow.

The SPA is the sale and purchase agreement. This is the main document under which the business and assets or shares are sold. It is entered into between the Buyer and the Sellers and will contain the commercial terms that were set out in the HOT/LOI. It will also include warranties from the Seller to the Buyer to underpin the price that’s being paid by the Buyer for the business. The warranties are statements about the business which the Buyer wants the Sellers to give, to give it comfort that it is buying the business it thinks it is buying. It will also include restrictive covenants/non-compete provisions preventing the Sellers from setting up in competition with the business and poaching staff and customers, so that the goodwill that the Buyer is acquiring is protected for a certain period after the sale has completed.

Tax Indemnity
This can be included in the Sale and Purchase Agreement/SPA but can also be in a standalone document. It is a promise from the Sellers to the Buyer to pay any tax that has not been paid or fully accrued for in the accounts of the Company.

Disclosure Letter
The Disclosure Letter is a document which is prepared on behalf of the Sellers and is addressed to the Buyer. Its purpose is to limit the Sellers liability for any potential claims which could be made by the Buyer against the Sellers after the sale has completed. The most obvious potential claim is a breach by the Sellers of the warranties. This letter provides the Sellers with an opportunity to tell the Buyer anything they know about the business which is different to what the warranties are saying. To the extent the Sellers have told the Buyer these things before the sale is completed, then the Buyer has no recourse against the Sellers in relation to these matters.

If you want to know anything more about selling your business, please contact Debra Martin.

Like to talk about this Insight?

Get Insights in your inbox

To Top