This latest instalment in Shepherd and Wedderburn's Start to Scale Essentials series covers the basic steps in a successful sale process. By Shepherd and Wedderburn Partner and corporate finance specialist John Morrison


WITH your business ready for sale, the next step is attracting the interest of potential buyers and, with a suitor committed to negotiations to acquire, managing the process and fulfilling key requirements to closing the sale.

Step 1: the IM
AN Information Memorandum or IM is a sales document, or package of documents, which intends to give potential buyers information about the company and to help motivate, and guide, their bids. 

Given its importance in attracting potential buyers, it is often prepared with the help of a professional corporate finance adviser.

The IM usually includes a description  of the business and its history; historical and up-to-date financial information; information on the market opportunity; projections for the future; information about employees and any key assets (including intellectual property); a summary of the management structure; and information about major customers and suppliers. 

Step 2: the NDA
AN NDA or non disclosure agreement will usually be agreed between the company (and, often, the sellers) and potential buyers prior to the disclosure of sensitive or confidential information about the company (which may include the IM). This protects the confidentiality of information disclosed during negotiations, and ensures potential buyers cannot use the disclosed information for their own benefit should the transaction not proceed to completion. 

Step 3: DD
DUE diligence or DD is the process by which a potential buyer ‘kicks the tyres’ of the company in order to identify any matters that require further information or investigation or that could be used to negotiate (or renegotiate) the transaction terms.

The output of the due diligence exercise usually takes the form of due diligence reports. 

Due diligence reports, usually drafted by legal advisers and/or accountants prior to completion of a sale, can influence the warranties and indemnities in the final sale and 
purchase agreement (which we will discuss further below) as well as the price (if issues going to value are identified). 

As part of the due diligence process, an online data room will usually be established to host all relevant documentation relating to the company. 
This assists both parties in the due diligence process and is a useful tool for tracking what has, or has not, been provided.

What if I am running a competitive auction?
IN a competitive auction process, where there may be multiple interested parties, data rooms will often be used to provide potential buyers with limited, but sufficient, information in order to allow them to submit meaningful bids. 

Bids will then be analysed and a further, more detailed data room opened up to preferred prospective buyers.

This ensures the information flow is kept tight and only serious, committed buyers receive the fuller information. 

We at Shepherd and Wedderburn, have developed our own in-house Hub data rooms for use in such scenarios, which allows us to manage the information sharing process for you. 

Step 4: The transaction itself
THE main agreement involved in a sales process is called a sale and purchase agreement (or SPA – the acronyms and jargon continue!). The SPA governs the sale and purchase of the share capital of the company and sets out terms applying to the transaction, including the parties, the price payable, how the transaction is structured; any restrictive covenants on the sellers, the indemnities, and the scope of, and any, limitations.

So, what are warranties?
PARTIES, dates to deliver certain items and restrictive covenants are usually well understood, but warranties (or their purpose) are often less so. 
Warranties are statements in the SPA relating to the company, its business, its assets, its accounts, legal compliance and much more. 

A buyer generally arrives at a value for the company based on these warranties and  the accuracy of the information documented. 

If the warranty turns out to be untrue, and the value of the company falls as a result, a seller could be liable to pay damages.

So, how do I protect myself from claims under the warranties?
A SELLER’S liability is limited to the extent that proper disclosure has been made against the warranties. 

The disclosure process aims to identify any potential areas where the warranties given in the SPA could be found to be misleading, untrue or potentially breached, and to disclose those to the buyer in order to seek to limit a seller’s exposure. This is an area where having experienced (and skilled) advisors engaged can pay dividends in limiting your commercial exposure in the sales process.


AN indemnity is a promise to reimburse the buyer in respect of a known issue should it arise. 

The purpose of an indemnity is to shift the risk of a particular event or matter to the seller(s) and allow the buyer to recover in full in relation to that particular event or matter.

Indemnities are used where a warranty does not allow a buyer to recover which, for example, would occur where the buyer has knowledge of the circumstance or event. 

Is there anything else we can do to de-risk the sale? 
THE SPA itself will contain limitations on a buyer’s ability to make claims for breach of warranties. 

These will often be financial limitations (such as a minimum financial threshold that must be met before a claim can be raised) as well as time limitations (such as a longstop beyond which no claim can generally be raised). 

Again, negotiating the limitations in an SPA requires experience and, if you have not experienced a sale process before, it is important that you engage the right advisor to guide you on these.

Warranty and indemnity insurance can provide some comfort for the seller(s) by enabling them to insure against any unknown liabilities which may result from the warranties and tax covenant in the SPA.

In return for placing this type of policy, the liability of the seller(s) will usually be significantly reduced (often, to very nominal values) under the SPA. 

This provides certainty for the seller(s) post deal. 

How, when and what will I be paid?
THERE are various pricing structures to be considered when selling a company and the choice as to which one is used will be based largely on the commercial drivers of the parties and their respective negotiating strengths. Some of the options include:

  • Deferred consideration: the buyer and the seller agree a fixed sale price, though part of the agreed price is not paid upon completion and is instead deferred until a later date.
  • Earn-outs: the final purchase price is subject to (usually) the future performance of the company; a percentage of the purchase price is paid at completion, with the remainder payable if certain targets agreed in the earn-out are achieved.
  • Earn-outs are often used to bridge a value gap between a seller and buyer (i.e. where the seller believes the future performance implies a higher value). 
  • Completion accounts: the buyer sets a purchase price, though the amount is adjusted after completion, based on a set of accounts showing the company’s true financial  position at completion. 
  • Locked box accounts: essentially a fixed-price deal is agreed based on the company’s historical accounts. In this case, the buyer assumes the risk of a fall in value and the reward of an increase in value between the date of the locked box accounts and the date of completion.  This provides certainty of price for the seller(s). 

Each of the items in the above – transaction process, warranties, indemnities, consideration and protections – take years to master. 

We have sought to provide a basic understanding for founders of the items to be considered before embarking on such a process and what the likely process will involve. 

A sales process can be challenging and it is important that parties have the right representation at the outset if they are to navigate the often difficult waters of a sales process and achieve a successful outcome.

Shepherd and Wedderburn’s corporate team combines industry knowledge and extensive experience with technical expertise, and is on hand to assist businesses at all stages of their growth journey. 
The team’s Start to Scale initiative, comprising written guides, interviews and in-person events, addresses some of the specific challenges affecting start-ups and scale-ups throughout their lifecycle to give entrepreneurs the insight they need to scale.
Visit for more information, or contact John Morrison, Partner in Shepherd and Wedderburn’s corporate team, at 


Proper preparation will project stand-out value

Remember, it is never too early to prepare. Here, Shepherd and Wedderburn set out some key items to consider when readying your business for sale


ALTHOUGH founders might aim to be in it for the long term and world domination, investors will usually require their investee companies to be working towards an exit, as generally that is how they realise the value of their investment. 

The most common route is a sale process in which the company either merges with, or is sold to, another company. 
Starting a sale process can be the biggest commercial decision a founder makes. 

Timing is critical: all sellers ultimately want maximum value, with minimum exposure to unnecessary risk.

Preparing your business for sale requires careful consideration of a broad range of factors, many of which are complex and critical, to ensure the company’s value (tangible – the assets you can kick; and goodwill – the value of the company’s brand or standing within its respective sector) is attractive to potential buyers. 

How to retain your key people
IN many sectors, including technology and life sciences, people are key. Often, buyers will seek reassurance that key personnel will remain with the business following the sale to ensure a smooth transition and continuity of service provision. 
Retaining key people with important knowledge may also affect the purchase price. It is therefore important to consider which key personnel will be staying in the business after the change of ownership and what value they may add. 

Are your terms of employment fit for purpose?
TERMS of employment (particularly in relation to key personnel) should be reviewed to take account of legal compliance; notice provisions; confidentiality; intellectual property ownership; and restrictive covenants. Reviewing this ahead of time, ensures that any issues can be identified, and rectified, before you are into the sales process itself and issues start to impact on value.

How you are incentivising / retaining employees? 
CHANGE can be unsettling and lead to uncertainty for your current workforce. 
Consider what measures can be taken to incentivise employees at this crucial stage. It may be worth considering the introduction of either:

  • A share option scheme: giving employees a right of ownership in the company in order to incentivise them to continue to deliver value. The basics of share option schemes were discussed earlier in the Start to Scale Essentials series.
  • A bonus scheme: this encourages employees to meet performance targets during what,  for those aware that a sale process may be undertaken, will be a period of uncertainty.

What are your pension arrangements
TO avoid any issues arising during the sale process, ensure you have the necessary pension arrangements in place for your employees to meet your auto-enrolment obligations (which is your requirement to enrol your eligible employees in a suitable pension scheme and pay a minimum level of contributions for them). 

It is also worth considering what pension schemes are offered and how to ensure employees’ pensions are protected and/or transferred following the sale. For instance, you may need to put in place documentation at the point of sale to ensure responsibility for the pension scheme transfers to the buyer and  that contributions can continue to be paid to it. 

How to maximise the value of your intellectual property rights
EXISTING intellectual property rights should be identified, as well as who owns these rights, the extent to which those rights are protected and whether greater protection is required. 

A company owning all or most of the intellectual property in the business is invariably more attractive to a buyer, and having formal, written agreements on the licenses granted is an important step in the buyer’s due diligence, identifying what assets, or indeed liabilities, they are agreeing to take on. This is a topic we covered in detail earlier in our Start to Scale Essentials series.

Your use of personal data
PERSONAL data contained in customer databases and marketing lists, can be an extremely valuable asset, but can also be considered ‘high risk’ if it has not been collected and used in accordance with data protection laws. A buyer will wish to see evidence that personal  data has been collected in a transparent way and that individuals are informed of how their personal data is being used in a clear and concise privacy notice. You should also ensure that you have made any appropriate notifications to the Information Commissioner and that your internal data protection policies and retention records are accurate and up to date.

Key customer and supplier contracts
A COMPANY with revenues locked in by way of robust, long-term contracts should (in theory) be more attractive to a potential buyer. You should ensure all trading relationships are formalised and documented for a potential buyer to assess and scrutinise and, if applicable, review standard terms and conditions for volume sales/orders. This is particularly important where identified revenue streams account for a significant percentage of the company’s overall business. Some of the key contract terms a buyer is likely to focus on in a sales process include duration, termination, intellectual property ownership, liability/caps and any restrictions on trade. 

Your real estate
A BUYER will conduct due diligence on title deeds for all properties owned by the company and the lease documentation for rented properties, so it is important these documents are in order and to ensure the company has sufficient property rights to cope with its current operations. Identifying any gaps ahead of time, allows for solutions to be put in place (often in the form of property insurance policies). 

Your records
PROPER and professional maintenance of company records gives a buyer confidence. Having properly maintained documentation of important records, such as accounts, payroll and the company’s statutory books – documenting all legal and statutory matters – should provide a paper trail, clearly documenting the company ownership, assets and liabilities.


Profit from accurate business valuation

Q&A with Douglas Lawson, Co-Founder and CEO of MarktoMarket


Valuation is often said to be an art. What would you say a normal valuation process should look like?

VALUATION of any asset is really about benchmarking to the market. With businesses, you are trying to find valuation data on comparable companies (“comparables” or “comps”) that have undergone a transaction recently.  

In its simplest form, you are looking at the multiple of profit that was paid for each of the comps, then calculating the median or mean multiple from your sample and applying it to the profits of the business you are valuing.  

This becomes trickier when the company you are valuing is not profitable (which is the usual case with companies seeking venture funding) – in these cases, people often default to revenue, rather than profit, multiples. For businesses that are pre-revenue, more creativity is needed. Some experts favour discounted cashflow (DCF) models, which predict the future cashflows of a business, then discount them back to arrive at a present-day valuation.

Being armed with this data helps your valuation argument but it is a basis for a negotiation. Ultimately, the price paid will depend on how attractive the asset is in the eyes of the buyer and how much competition there is for the asset. Anyone who has ever sold a house will understand this.

What are the key variables in valuing a private company?
GOING back to the most straightforward method of valuing a company – the multiples based approach – the multiple chosen will vary depending on a number of factors.  

For example, different industries tend to be valued at different multiples due to perceived quality of earnings.  

For example, software companies with recurring revenues will, in general, be more highly-prized than hardware businesses with one-off sales.  

Another variable is size – all other things being equal, a larger business will typically attract a higher multiple than its smaller counterpart, the consensus being that size makes a company less risky.

Growth will also impact pricing.High growth businesses can attract elevated multiples as, if the growth is sustainable, the profits will “grow into” the multiple. In other words, whilst the price may look initially high as a multiple of profits, this multiple will appear more modest on a forward-looking view.

What trends are you seeing in valuations for scale ups in the UK just now?
WE are seeing valuations contracting but not to the same extent as the public companies.

The trend that is more indicative of the health of scale ups is the number of deals and quantum of funding being invested in this area. 

On this measure, the picture is bleak – the last quarter saw Series B+ (investments of £10 million and over in scale-ups) funding shrink by 66%.

What does Mark to Market do and how could it help founders?
MARKTOMARKET is a data platform with rich intelligence on private companies, particularly SMEs and start-ups.  
It helps advisers and investors identify, research, value and connect with businesses. 


Figure out the correct exit strategy

Advisor, Investor and NXD. CEO of Smeaton and Associates – and former CEO of Edinburgh-based TVSquared – Calum Smeaton advises that timing is everything when selling a business


At what stage of building a company should you be considering an exit strategy, if at all?
AS early as possible. The type of business you are building will dictate the likely exit route, lifestyle businesses are more difficult to “exit” and high growth venture backed businesses are put on a conveyor belt to get to an exit. The quicker you know what type of business you want to build, the quicker you can start thinking about your exit strategy, which ensures you put in the foundations to make it easier to exit when the time comes.
How do you know it is the right time to sell your business?
THERE are two parts to that problem, the first being are you ready to sell and the second being is the market ready to buy. 

As a founder you need to be ready to let go of your baby and you need a team and the foundations in place to be able to successfully complete a transaction. 
If the market you are in is getting bigger and it attracts larger more established competitors to enter into it, you may find there is a window of opportunity to exit before the market gets hyper competitive.

The market typically tells you when you can exit, competitors being bought, inbound interest and strong growth rates across the market. 
Trying to sell when the market isn’t ready is like pushing water up a hill.

Are there any common mistakes that founders can often make when it comes to selling on a company?
UNDERESTIMATING the time and resource it takes to complete a successful process. 
If you are not set up with the appropriate resource and skills to run the company and run the process in parallel, then both will suffer. 
Not having the right advisors from legal, finance and investment banking is a common mistake. It is better to get the best you can afford than trying to do it on the cheap.               
What advice would you give other founders who may be considering selling their company?
MAKE sure you are really ready to sell, both from an individual perspective and from a team perspective. If you don’t have strong foundations in place and you don’t have good corporate hygiene, then it will be difficult to get a good outcome.

What advice more generally would you give to first-time entrepreneurs?
DON’T give up. If in doubt, be bold. Remember, experience is the thing you get just after you really needed it.