Whether you own a company or have invested in one, selling your shares in a business is a great way to release wealth.
However, selling shares isn’t like selling a car. With more money at stake and a more complex sales process, selling shares can quickly turn into a nightmare.
All this can be avoided with a strong understanding of how the process for selling shares works and what you need to do to make it a success. With that in mind, we’re going to explore how you can sell your shares in a business the easy way, whether you’re a minor or major shareholder.
Work Out What You’re Entitled To
Before you consider selling shares, you need to have a good idea of what they’re worth, and for that you need a professional valuation.
Business valuations come in many varieties. Some are based on the assets the business owns, while others may be calculated using a company’s profit or turnover.
Which type of valuation is most suitable for your shares will depend on whether you’re a minor or major shareholder and the details of the business.
How to Sell Minority Shares in a Business
If you’re considering selling minority shares, you may find that your options are limited.
First of all, there may be provisions in your shareholders agreement which limit your ability to sell to third parties outside the company. A common example of this is the inclusion of pre-emption rights for existing shareholders, giving them the right to buy your shares first.
Secondly, even if you’re keen to sell to an external party, the cost of doing so could far outway the worth of your shares. Later in this blog we look at the process of selling shares externally and you can get a sense of how complex, time-consuming and costly the process can be.
Finally, even if you’re determined to sell externally, you may find it very difficult to even attract a buyer who is interested in acquiring a minority shareholding. It’s likely you’ll spend more marketing your shares than you would receive for them if you were to find a buyer.
So, for most minor shareholders, selling their shares back to the company or an existing shareholder is the best option. However, if you’re still worried that this won’t result in the best deal for you, there are steps you can take to improve your sale price.
In the event the value you place on the shares is different from the one the company places on them, you can look at incorporating deferred consideration into the sale.
This solution works by offering to sell your shares for a lower price but then receiving ‘deferred consideration’ payments over the following years.
This is a win for you because you get their full value and a win for the company, as they get to spread out their payment obligations.
If you’re worried about your shares being sold on for more in the future, then you may consider including an anti-embarrassment clause in the purchase agreement.
This would mean that if the company does happen to sell in the future, and your shares are therefore sold for a much higher share price, then you would receive a proportion of the increase in their value.
If you’re caught in two minds between selling and keeping your shares, an anti-embarrassment provision could be the solution.
Sell to Investors
If your minority shareholding is in a startup company that has plans to grow through investment, then you may have an opportunity to sell your shares to an investor.
This is made easier if the company is enjoying lots of demand from potential investors.
How to Sell Majority Shares in a Business
When it comes to selling shares you have a host of options. You may choose to take the traditional route and market to buyers, or a more modern approach may be suitable, such as selling to an employee ownership trust .
What works best will depend on a variety of factors, including your business’s size, the market you operate in and how well-known you are.
If you own majority shares in a business, it’s likely they have a high worth. Therefore, you should consider shopping around for the best price.
If you sell to an external party, then far more thought, planning and process needs to be put into the sale. Without this, you could easily sell for too low a price or, even worse, be left with serious liabilities. It goes without saying, that for a clear idea of how you should sell your shares, you need to speak to an experienced corporate solicitor.
If you are selling majority shares, then you need to have a process in place similar to this:
- Preparing for sale: Selling shares can be an extended process even for the most organised of people. You need to make sure you’re prepared before you start looking for buyers. That means having key documentation to hand, such as previous years’ accounts, so at a moments notice your business is ready to be viewed.
- Find a buyer: Finding a buyer for shares can be very difficult, especially if you’re trying to keep the sale off the radar of staff and customers. While there are marketing portals you can use, many shareholders elect to use a business broker who can generate qualified buyers without a lot of noise.
- Negotiate a deal: When you do find a potential buyer, the obvious next step is to negotiate a deal. This can be a long process during which the structure of the sale is also discussed, so don’t enter into negotiations without expert help.
- Agree on heads of terms: Once you’ve negotiated a deal you’ll want to complete a heads of terms document. This is an opportunity for the details of the sale to be put on paper, and allows the seller and buyer to signal that they’re serious. While you’ll both sign the heads of terms, it’s not usually a legally enforceable document.
- Due diligence: When someone buys your shares, they also buy your liabilities. Therefore, the buyer will need to conduct extensive due diligence and will request a number of documents from you, along with asking plenty of questions.
- Completing a SPA: Once due diligence has been completed, you’ll need to complete a share purchase agreement (SPA). This is the legal agreement for the share sale. As part of this, it’s likely you’ll need to provide a number of warranties (contractual statements) to the buyer as to the condition or state of the business.
- Providing a disclosure letter: Where you are required to make warranties, you may then need to provide a disclosure letter that highlights matters that, if they were left undisclosed, would breach the warranty given.
- Filling in a stock transfer form: You’ll then need to complete a form with your details, the number of shares being sold and the price per share. You’ll also need to provide details of the buyer.
The above information is just a general overview of the share sale process. In reality, there may be more steps that you need to be aware of. Therefore, before you consider selling your shares, speak to a solicitor.
Other Considerations when Selling Shares
With the right plan in place (and some expert help) selling your shares in a business and getting the best price does not have to be a nightmare. However, when it comes to selling shares, price should not be your only consideration.
The steps you take before and after selling your shares can have a fundamental impact on the tax you pay and, ultimately, what ends up in your bank account.
This is just one more reason why selling your shares in a business should not be undertaken without expert legal help.
For more information and advice on how you can sell your shares, speak to Glaisyers’ team of corporate solicitors.