Trade deals: Beware the pitfalls

Trade sales come in all shapes and sizes but the pitfalls sellers face are commonplace:

Confidentiality

Before information is shared, you should consider whether the sale should be confidential. Is your business high profile? Does it have trade secrets?

How much of your business is already in the public domain? It is advisable for the parties to sign a confidentiality agreement before talks begin to ensure any information shared remains confidential.

Due Diligence

Due Diligence is a research exercise carried out by the buyer. It often takes the form of a comprehensive questionnaire which the buyer asks the seller to complete.

Often the due diligence exercise can be overwhelming. Start by eliminating irrelevant questions by answering ‘N/A’. Next, highlight any questions that have been answered in prior correspondence or is publicly available. Answer these by noting the location of the information.

For the remainder, we would suggest putting together a folder, in question order, which your answers and supporting documentation can be uploaded to. This will streamline the process when sending through to your advisers.

Asset Sale or Share Sale

There are two methods to selling a business:

A Share Sale transfers the shares in the business to the buyer, with the buyer inheriting all assets and liabilities of the business. This is often the preferred method for sellers because of its simplicity and clean break effect.

An Asset Sale involves the buyer acquiring an agreed collection of assets and liabilities relating to the business.

The parties can cherry pick which assets and liabilities transfer.

Both methods require thorough legal drafting and negotiation and it is important to chose the correct structure for your exit.

Both legal and accounting advice is invaluable when choosing the correct structure for your exit.