Selling shares in a company can be a significant milestone, whether you are bringing in investment, restructuring ownership, or selling the business outright. While the process can feel complex, understanding the key stages and documents involved can make it far more manageable. This article provides an overview of a typical share sale. In practice, however, there is no one size fits all scenario, and the particulars and timescale of a share sale will vary depending on the circumstances.
Why sell shares?
There are several reasons why shareholders may choose to sell or transfer shares.
One reason is to generate cash or investment for the company by bringing in new investors. Selling shares can provide capital to support growth, expansion, or new projects.
Another reason is to reward or incentivise employees. Shares are often transferred to key employees or management as part of long-term incentive plans, helping to align their interests with the success of the business.
Of course, a shareholder may also wish to sell their shares to liquidate their investment in the business when exiting or retiring.
Finally, shares are often sold as part of a business sale. In a share sale, a buyer typically acquires all (or most) of the existing shares in the company, giving them ownership of the company along with its assets, contracts, and liabilities.
How much should shares be sold for?
There is no fixed price for shares in a private company. Unlike publicly listed shares, the value of shares in a private company is not set by the stock market. Instead, pricing can depend on a range of factors. These usually include the company’s past financial performance, its future profit potential, the strength of its management team, and wider market conditions.
The purpose of the sale may also matter. For example, someone selling shares to attract a strategic investor may be willing to sell a larger percentage at a lower price if the investor brings expertise or contacts that could help grow the business.
The valuation process can be complex and it is common to involve accountants or corporate finance advisers to help agree a fair and realistic price.
The process of selling shares
While every transaction is different, most share sales follow a similar structure.
1. Assembling the right team
Engaging the right advisers early can save time and reduce risk. A solicitor will guide you through the legal process, prepare and review key documents, and help identify potential issues before they become obstacles to the transaction. An accountant is also often involved to advise on valuation, tax, and financial disclosures.
2. Agreeing heads of terms
The share sale process usually begins with agreeing the main legal and commercial terms of the deal. These are often recorded in a short document known as a “heads of terms”. This document sets out details such as the transaction structure, the agreed price, what shares are being sold, and the proposed timetable. It may also include provisions relating to purchase price adjustment mechanisms and any applicable conditions precedents, such as the completion of satisfactory due diligence.
While generally not legally binding, the heads of terms provide a clear framework for the rest of the transaction and for negotiating a definitive share purchase agreement (SPA).
3. Due diligence
Due diligence is the buyer’s opportunity to investigate the company before committing to the purchase. Due diligence can be one of the most time-consuming stages of the sale process. The buyer will request information about the company including its finances, contracts, employees, property, any legal disputes, intellectual property, legal compliance and more. For more detail, please see our latest article on due diligence here.
From a seller’s perspective, preparation is key. Having company records, accounts, contracts, and policies organised and properly maintained in advance can significantly speed up the process and reduce follow-up questions from the buyer.
4. Preparing the Share Purchase Agreement (SPA)
The SPA is the main contract governing the share sale. It sets out the legal terms of the transaction and is usually drafted by the buyer’s solicitor.
An SPA will typically include details of the company and the parties involved, the purchase price and payment terms, and how and when the sale completes. A substantial part of the document is often taken up by warranties. Warranties are statements made by the seller about the condition of the company, covering areas such as finances, tax, assets, employees, and ongoing disputes. Warranties help the buyer understand what they are buying and can provide protection if issues with the company later materialise.
The SPA may also include restrictions on the seller, such as non-compete clauses, and provisions limiting the seller’s liability after completion.
For more details on SPAs, please see our article here.
5. The disclosure letter
The disclosure letter, another key transaction document, is closely linked to the warranties outlined in the SPA. In this document, the seller discloses specific matters that qualify the warranties given by the seller. It provides a protective function for the parties and ensures a fairer balance of risk, reducing the likelihood of post-completion disputes. For further information regarding disclosure letters, please see here.
6. Completing the transaction
Concluding a share purchase involves a two-step process:
- Exchange of the SPA – At this stage, the parties sign the SPA, creating a legally binding commitment to proceed with the transaction.
- Completion of the SPA – This is when the steps necessary to implement and finalise the transaction are carried out. Typically, this includes the seller providing an executed stock transfer form for the sale shares and the buyer paying the purchase price.
In many transactions, completion occurs immediately after exchange of the SPA, effectively combining both stages into a single step (known as simultaneous exchange and completion).
However, in some cases, a delay between exchange and completion may be required. This usually happens where additional conditions must be satisfied after the SPA has been signed but before the transaction can be completed.
7. Post-completion matters
After completion, there are still practical steps to take. These can include updating the company’s statutory registers and notifying Companies House of changes such as new directors and persons with significant control. Ensuring these filings are handled correctly is an important final step in closing the transaction.
Role of Culbert Ellis
Selling shares in a private limited company is a detailed process, but with the right preparation and professional support, it can run smoothly. Early advice, clear communication, and carefully drafted documentation all help to protect your position and keep the transaction on track.
At Culbert Ellis, our corporate team regularly advises shareholders and businesses at every stage of a share sale, across a wide range of transactions. We provide practical, tailored guidance to help ensure the process is completed efficiently while protecting your interests throughout. Our team can assist with drafting the key transaction documents and support clients through the due diligence process and completion requirements.
How To Get In Contact
If you have any questions about selling shares in a private limited company, please speak with our corporate lawyers on +44 204 600 9907 or email info@culbertellis.com.
Accurate at the time of writing. This information is provided for general information purposes only and should not be relied upon as legal advice.
