September 2010 - Legal advice on selling your business

Company directors are subject to so many duties that, if they are not careful and don’t take proper advice, they can easily find themselves in breach of one or more of them. But, in SMEs and family-owned companies, the directors and shareholders are usually the same people; so who cares anyway, and how would anyone find out about the breaches?

Some breaches are very easy to commit, and many directors don’t even know they are doing anything wrong. For example, there are various requirements (usually found in the Companies Acts, the company’s articles or other Acts of Parliament) to obtain approvals for certain transactions from either the board of directors or the shareholders, or to declare certain interests.

In general, it’s the company itself that can take action and, for SMEs and family-owned businesses, it’s unlikely that the board would decide to take action against one of its own members. Exceptions occur in the case of disputes (especially family disputes) which do occur and more often than you might think.

Major problems can often happen if a company becomes insolvent or it is sold.

If a company goes into liquidation or administration, the liquidator or administrator might well look at all the board minutes and shareholders’ resolutions and, if they find any breaches, they can take action against a director to pay money back to the company. They are also under a duty to report any misconduct to the Department for Business Innovation and Skills (BIS), who can take action to disqualify the director or bring criminal proceedings, if the circumstances warrant it.

If a company is sold and the new owners find that things aren’t going as well as they hoped, they might well start looking into the company’s documents themselves to see if they can take any action against the previous directors.

So what can you do to protect yourself?

1. Make sure you know your duties and responsibilities as a director, and take advice if you don’t.
2. If you think you might have breached some duties, take advice on how to remedy the situation – don’t ignore it.
3. If you fear insolvency, take advice as soon as possible – don’t leave it until after the company has gone down.
4. Similarly, make sure things are in order before you sell your company.
5. And, if a claim is made against you, take advice at the earliest opportunity to put yourself in the best position and, at the very least, seek to limit the damage.

For advice on your duties and responsibilities as a director contact Cousins Business Law. 

If you’ve received a great offer from a business pal to buy you out of your business, or you’ve had a ‘too good to refuse’ approach from a competitor, the temptation might be to press rapidly ahead before the buyer changes their mind. You might see the freedom and a substantial cash sum as a great incentive to sign on the dotted line, even if the agreement is one you’ve drawn up between you.

This is so dangerous. Without proper advice you might not realise a realistic sale value for your business, the sales process may drag on and you may find the other side trying to renegotiate on points you felt were already settled. Perhaps more importantly, you might not realise the ongoing liability you will still have beyond the sale.

Using an experienced commercial solicitor, you can protect yourself and potentially increase the cash value you receive. Here are the first of 10 reasons why it is essential to use a good solicitor when selling your business:

1. Structure for the best deal
 
The two main methods of structuring the sale of a business are to dispose of the shares or the assets. The two are fundamentally different but a solicitor will be able to advise on the advantages and disadvantages of each from a legal perspective.

Without proper legal advice, it’s all too easy to end up transferring the assets of the business whilst still being responsible for all contracts that the business has entered into. This would leave a situation where you end up having to pay suppliers for goods and services rather than the buyer.

It’s also essential to take tax advice on the most effective structure for any business sale. 
 

2. Keep it quiet
 
During the sales process, the buyer will have access to a large amount of information about the business, which you might want to keep confidential. A solicitor can draft a binding agreement preventing the prospective buyer from disclosing this to any other party.

The types of information that a buyer will see are customer lists, full accounts (not just those available at Companies House), prices, profit margins and marketing strategies. If there is no confidentiality agreement in place and the deal falls through, you will be powerless to stop the buyer from using that information to gain a big advantage in competition with you.

Read the remaining 8 reasons to use a solicitor when selling your business here.

Leasing business premises can be a real minefield for the unwary business owner. In a series of posts, Commercial Property Solicitor, Steven Petty, takes us through the various aspects of a commercial lease to explain some of the legal jargon and also provide some lease negotiation tips along the way.

A is for Alienation: Essential reading for anyone leasing commercial premises

Well we're on our first letter of the alphabet and already we have some legal jargon to contend with. 'Alienation' is just a legal term which covers a tenant's right to deal with a lease. The most common forms of dealing are selling the lease (otherwise known as assignment) and subletting. Alienation also covers charging of leases and sharing occupation of the premises.

The alienation provisions in a commercial lease are one of the bits a tenant is most likely to have to understand as it is very common for a tenant to want to move or give up business premises.

The crucial thing to remember about alienation is that the landlord's permission is normally required for anything you want to do. If you want to sell your lease or sublet the premises, check first of all whether what you want to do is allowed. Selling the lease is almost always allowed but subletting might not be and subletting or assigning part of the premises is frequently prohibited.

Once you have found someone who wants to take over your premises, you will need to make a formal application to the landlord for consent. You will be responsible for paying any legal and surveyor's costs the landlord incurs in dealing with your application.

The landlord is entitled to require you to provide enough financial and other information about the proposed new tenant to make a judgment about their suitability, and the lease will normally set out the circumstances where the landlord can withhold its consent.

The lease will also usually provide a list of conditions that the landlord can attach to its consent. The main one from your point of view is a condition that you must stand as guarantor for the new tenant. This condition is included in the vast majority of commercial leases and means that you are still not off the hook as if they default you can be required to take the lease back.

Subletting is a useful alternative to assignment if the proposed new occupier wouldn't be acceptable to the landlord as the main tenant or market conditions make it difficult to find someone to take on the premises at the current passing rent. Beware, however, that some alienation provisions prevent you from subletting for less than the passing rent which removes one of the main purposes of subletting. You are also still responsible to the landlord for payment of the rent even if the subtenant isn't paying you.

Follow the posts on the Cousins Business Law blog, subscribe to the RSS feed here.

For further advice on commercial premises, contact Steve Petty on 01926 629005.

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