Outing yourself

Miguel Pereira is a partner in the Corporate & Commercial team at Stone King LLP

Miguel Pereira is a partner in the Corporate & Commercial team at Stone King LLP

So you want out? Out of your business that is. You are not alone because there are lots of reasons that drive an operator to sell a business, or part of it. It may be that you take the view that with improved economic prospects you might get a better price. Or it may be that your view is more negative and you want to get out because you have had enough! Maybe yours is a family business and while you were hoping that Peter Junior or Jane Junior would take over the business they are now telling you that they would rather stick pins in their eyes than manage buses.

And of course, one must not forget that if the Traffic Commissioner has so taken against an operator that the licence is revoked and/or the directors disqualified, then a forced sale may be the only option.

Whatever the reason, for most operators selling their business will be a ‘once in a lifetime’ event which can be daunting and potentially stressful. This article will summarise the sale process and give you some tips which you may find helpful.

Get your house in order

There are a number of steps operators can take to prepare for an exit and make their business an attractive investment proposition. For instance:

Developing management succession – if an owner manager is looking to retire, a potential buyer will want to ensure there is a competent second tier of management with a track record of running the company. If you are the Nominated Transport Manager it would also be sensible to ensure that there is another CPC holder in the business who can assume these functions if required post sale. There are provisions for a Traffic Commissioner to give a period of grace for a new Transport Manager to be found, but when you are trying to make your business look as attractive as possible, it might be one fewer thing for a prospective purchaser to think about.

Review of finance functions – most buyers will expect to see efficient systems with the ability to produce timely and accurate monthly management reports which will track key performance indicators.

Review of tax compliance – tax is a risk area that buyers will invariably look into, and therefore, it is important that you keep your corporation tax, PAYE and VAT affairs up to date.

General housekeeping – tasks that are commonly left undone may include ensuring that all client contracts are recorded in writing and are signed, company books are up to date, ensuring brands and domain names are properly protected and that all data protection registrations are complete. These will give the buyer great comfort that the business is well ordered, disciplined and carefully managed.

Operator’s Licence compliance – you should do a complete review of your O Licence compliance systems including:

  • Checking all maintenance records;
  • Checking you have up to date maintenance provider contracts;
  • Checking all your registrations are up to date and actually record the routes that are run by your vehicles;
  • Checking tachograph and drivers’ hours compliance;
  • Checking drivers’ CPC training and records are up to date;
  • Ensure you know your OCRS score and the reasons for it.

Views of any fellow shareholders

As part of your preparatory steps to a sale it will be important to understand the attitude of any fellow shareholders of the company, particularly if you are legally required to consult and obtain their prior approval. If there are several shareholders with potentially conflicting agendas it may make sense to get all shareholders to enter into a formal memorandum in advance of a sale to outline the key issues. This will help to focus everybody’s minds on such matters and can also help to flush out potential areas of dispute.

What is the value of your business?

Every business is unique and there is no one size fits all approach to valuations of businesses. To get the most realistic valuation you should take professional advice from a specialist corporate financier or accountant. The following are the most common methods used to value a business:

Multiple of earnings basis – this is often used for businesses which have little in the way of tangible net worth. The most appropriate multiple will depend on a number of factors but in private company sales the majority of deals are usually done at multiples of between 5 and 10 times of EBIT (earnings before Income and Tax).

Discounted cash flow basis – this method of valuation converts the anticipated future operating cash flows of the business into a present day value using an appropriate discount rate to reflect the risks in the business.

Net asset basis – this may not be appropriate for companies where most of their value will be in the goodwill however net asset values may still feature as part of the overall valuation particularly where net current assets of the company are in excess of the business working capital requirements.

Appointing your advisers

The identity and number of advisers will depend very much on the stage and the complexity of the transaction. It may make sense to appoint a firm of corporate finance advisers to assist with finding a suitable buyer. You will also need to consider appointing lawyers, typically from the outset of the transaction, although their role at the early stage will be limited to preparing a confidentiality agreement. To complete the team you will need to appoint a firm of accountants to advise on tax. Any discussions will be very sensitive and should be restricted to the smallest possible number of people as rumours of an impending sale can be de-stabilising for staff.

Initial offer and letter of intent

A buyer will make an initial offer in writing which will set out the very basic terms that he is prepared to buy the company. Once accepted, the next step is usually for the buyer’s advisers to draft what is known as a Letter of Intent, which will set out the key terms of the transaction that have been agreed in principle. This document, usually non-legally binding, will set out the following:

The financial terms (including any formula for arriving at any deferred payment).

The form that the purchase price will take, particularly if there is to be a non-cash element.

The deal timetable and completion date target.

Whether the buyer is to be granted a period of exclusivity to carry out negotiations and due diligence and, if so, for how long.

Due diligence

Once the letter of intent has been signed the buyer will embark on its due diligence. This is an important part of the process because the legal principle of caveat emptor (buyer beware) applies. Effectively, this means that once the buyer has bought the business it cannot complain afterwards. Therefore buyers are best advised to find out everything they possibly can about the target business before parting with their money. Should the due diligence reveal any issues of concern the buyer can then decide how to address those problems.

Share purchase agreement and other documents

While the due diligence process is progressing, the buyer’s lawyers will start drafting the detailed documentation of which the share purchase agreement will be the main document. This will set out the terms of the purchase and will include all the protection sought by the buyer. Sellers are often surprised at the length of this document which can range from anything between 40 to over 100 pages in length depending very much on the size and complexity of the deal. In addition, this agreement will contain the following:

Any price adjustment mechanisms – for instance buyers will usually require that the business is left with sufficient working capital in order to self-fund it after completion.

Seller restrictions – buyers will often seek to impose non-compete restrictions on the sellers for a period after the sale, usually one to two years, in order to protect the goodwill of the acquired business.

Warranties – these will comprise the bulk of the share purchase agreement. Warranties are the means by which the buyer will obtain additional protection against any unwanted surprises that affect the value of its investment.

At the same time that the share purchase agreement is being negotiated other documents will be prepared as part of the transaction, such as the tax covenant. The tax covenant is designed to ensure that the buyer is able to recover on a pound for pound basis any tax that the target company has not paid as at the date of the sale.


If the buyer is happy with everything its due diligence has revealed and the negotiations over the share purchase agreement and related documentation are successful, the deal can be signed and contracts exchanged. Exchange may take place simultaneously with completion or at any earlier date. A typical reason for having an exchange and completion taking place at different times is that further conditions must be fulfilled before completion.

Merger and acquisition activity is increasing as confidence returns to the market. Now may be the time to start getting the ‘house-in-order’, even if you are not considering selling in the short term. Such steps will make an eventual sale less stressful and probably more lucrative in the long term.

The fire sale

As mentioned above, sometimes a business has to be sold because the licence has been revoked and the directors disqualified. Of course in these circumstances, the Traffic Commissioner involved will intend to cause serious disruption of, or the cessation of the operator’s business and it is not surprising that it does in fact do that. The situation is made worse for the operator when the disqualified directors are the shareholders. Nevertheless, there are steps that can be taken to protect the shareholders interests. Such steps may include a complete company and share restructure. An operator in this situation should take detailed legal advice with a view to putting to the Traffic Commissioner an application for a new licence that might be deemed to be acceptable.

Post completion

An operator has an obligation to notify the Traffic Commissioner within 28 days of changes that might affect the operator’s licence. The sale of a business or part of it will fall within that category and you should not assume that the Traffic Commissioner will somehow magically find out from another source and be satisfied with ‘back door’ notification.

Similarly, if you are the Nominated Transport Manager and no longer want to be you should apply to be removed as such. If you do not, you may be in for a nasty surprise post sale when the new operator fails in its obligations.

Finally a note to the buyer . . .

Finally, as most readers will be aware, an operator’s licence cannot simply be sold on by the licence holder to a new holder. Rather, anyone who wants a licence must go through the proper application process with the opportunity for scrutiny by the Traffic Commissioner of the proposed holder’s suitability to hold it.

Sometimes a ‘wannabe’ operator spots a small business, maybe with an operator’s licence authorising a handful of vehicles and decides that it will be much easier to buy the shares in the company and drop in its own operations so gaining effective control of an operator’s licence without the bother of the licence application process. Buyers need to be aware that Traffic Commissioners are aware of this tactic and will carefully scrutinise the management of the company under the new management.


Written by Andrew Banks and Peter Woodhouse of Stone King’s Transport Team. Contact them on [email protected]; [email protected] Efficiency, understanding and communication. This article is for guidance only. The law and practice referred to has been paraphrased or précised and should not be construed or relied upon as legal advice.




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