There are a variety of circumstances that could lead to the decision to sell a company. It could be prompted by an incapacity to continue operations, rising economic losses, a superior offer from a competitor or investor, or simply a decision to go a different path.
Whatever the case may be, it’s crucial to remember that selling a business is more complicated than simply drafting a contract. There are laws that govern such a procedure, and you should make sure that you follow them to avoid future problems.
This article will go through the legal aspects of selling a business, how to go about doing so, and some pointers on how to make the process go more smoothly.
Selling a Business in the Philippines: Legal Considerations
Bulk Sales Law
The Bulk Sales Law (or Act No. 3952 as revised by Republic Act No. 111) is the main law governing business sales. Essentially, this law protects creditors and suppliers by preventing the defrauding of creditors through the secret sale or bulk disposal of all (or substantially all) of a merchant’s stock of goods.
A sale is considered a bulk sale under the Bulk Sales Law if:
- There is a sale, transfer, mortgage, or disposal that is not in the ordinary course of a business’s trade and operations;
- The business or trade is being sold entirely or nearly entirely;
- The transaction includes all or nearly all of the business’s fixtures and equipment.
Several requirements are required by the Bulk Sales Law. These are some of them:
- The bulk sale must be accompanied by a sworn document from the vendor/mortgagor that contains the names and addresses of creditors, as well as the amounts owed to them;
- The buyer will be given the sworn statement;
- The seller must establish an inventory of the stocks that will be sold.
- The seller must notify the creditors of the impending transaction at least 10 days before it takes place.
If you meet the following criteria, you are exempt from the preceding formalities:
- The transaction takes place in the normal course of business.
- All creditors have signed a formal waiver.
- The sale is made pursuant to a court order.
- The sale is done by an insolvency assignee or someone who is not a creditor.
When the Bulk Sales Law is broken (which means the preceding standards aren’t completed), the bulk sale is nonetheless legitimate between the parties but void in the eyes of impacted creditors. This means that the purchase is regarded as holding the property in trust for the seller, as well as being accountable to the seller’s creditors for the properties included in the bulk disposed of therein.
All of this effectively means that you must follow the Bulk Sales Law before purchasing all (or almost all) of a company’s assets.
In the Philippines, there are steps to selling a business
Calculate the Business’s Worth
You must first evaluate the market value of your firm before making any moves toward its sale. There are a few things to think about in order to accomplish this.
Price to Earnings Ratio – To calculate the value of a corporation, you can predict its earnings for the next three years or so and multiply them by the typical price to earnings ratio.
Revenue – You could also use the amount of money the company makes in a year or enlist the expertise of a business broker to figure out how much it is worth in the sector.
Add up the value of all the company’s assets — You should also think about the value of all the company’s assets. This should cover all merchandise as well as any business equipment. These items’ worth should be factored into the final price you decide on.
You can utilize online NPV calculators to do a discounted cash-flow analysis. This research focuses on the company’s annual cash flow and forecasts it for the future. The future cash flow value would then be discounted to today’s value.
Other Factors — In addition to financial concerns, you should think about things like geographic location and industry projections, among other things, that could effect the value of your company today or in the near future.
Prepare all necessary business and legal documents.
Another thing you should do is make sure that all of your critical business documentation are in order before you sell your company.
Know that any possible buyer, no matter how big or little your company is, would expect you to have your documentation ready. After all, they’ll need to examine these documents to determine how successful your company is and whether it’s a suitable investment.
Prepare the following financial and legal documents:
- Balance Sheet has been updated.
- Statement of Cash Flows
- Insurance Policies Currently in Place
- Returns for the previous three years
- Last Three Years’ Profit and Loss Statement
- Employment Contracts
- Agreements of Confidentiality
- a copy of the existing lease
- Business Profile in Extensive Detail
- Contracts with distributors, suppliers, and others that have already been signed
- Any Seller Financing Document
- Any other legal or financial paperwork
Decide whether you’ll sell your company on your own or with the help of a broker or investment banker.
There are times when selling your business yourself is the preferable option, such as when selling to a family member or a trusted employee, or when you need to save money and can’t afford a broker’s commission.
In most other cases, though, using the services of a broker can make a significant difference. For starters, you’d have more time to keep the company afloat.
A broker may be able to get you a better price for your company while also giving you more options.
If you decide to engage with a broker, take your time selecting the perfect one for you. Make a list of the ones that pique your curiosity. After you’ve narrowed down your choices, interview them and listen to their proposals and plans of action before choosing one.
Find and qualify buyers.
One of the most time-consuming aspects of selling a business is finding the proper buyer.
It could take anywhere from six months to two years, or perhaps more. However, it’s not a good idea to go with the first buyer you come across. It’s preferable if you can choose from at least two or three possible buyers.
Check to see if the potential purchasers have been pre-qualified for finance. Make some room for negotiation, but don’t be misled if a price is provided that you don’t like.
Any agreements you reach should be in writing, and don’t forget to have your potential buyers sign a nondisclosure agreement to secure your information.
Another effective approach for discovering potential business buyers is to use online platforms like:
Create a Presentation
Even if your company is well-known, don’t expect potential buyers to know everything there is to know about your company. You should expect to have to furnish them with all of the information they require.
If you have a good visual presentation, a potential buyer will be more interested in what you have to offer. Make sure your presentation covers all of the crucial details and emphasizes your strengths while pointing out any flaws.
Don’t make the mistake of concealing any flaws, as your potential buyer will almost probably double-check the facts you supply. As a result, it will be preferable if any potential difficulties are disclosed right away.
Close the Deal and Negotiate
Aside from the purchase price, there are several financial and legal aspects to consider when completing a transaction, as previously stated.
Consider the sale price to be the final conclusion. When you’ve chosen a buyer for your company, you’ll need to work out the conditions, which might include seller financing, any liabilities that the buyer will absorb, any employment contracts, assets that will be maintained, earnout, and more.
You can only close the sale if both parties have agreed to all conditions through negotiation.
Selling a business is a time-consuming and emotional process for many people. A compelling motive to sell or the presence of a “hot” market, as well as professional assistance, can help alleviate the strain.
When it’s all said and done, the enormous number of money in your bank account, as well as your newfound free time, will make the arduous process seem justified.