Buying or Selling a Business
These are the main points you need to look at when you buy or sell a company:-
- Remember that no matter what assurances you are given, the deal is not complete until all parties sign the legal documentation and the business has been transferred. It is not unusual for a deal to fall through at the late stages of negotiation and therefore it is crucial that if you are a Seller, you do not run the business down by thinking that the business will be sold.
- The negotiations will throw up obstacles which can affect price, timing and sometimes whether the deal is worth the effort.
- If the transaction is a straightforward sale or purchase of shares, there will usually only be three parties as follows:-
- Target (the company whose shares are being purchased);
- Sellers (the holders of the shares in the Target);
- Purchaser (typically a company, purchasing the shares being sold in Target).
Depending on how the purchase is being funded, other parties, such as banks and Investors may also be involved.
- Remember to sort out your preliminary agreements before you go charging in spending money on investigation or giving out information on the company. Preliminary agreements will usually be:-
- Heads of Terms - this outlines the deal that both parties have initially shook hands on. It should not be a detailed document but it should be sufficient to make sure all parties know the terms and that no one has misunderstood any basic principal of the deal.
- Confidentiality Agreement - this is something that a Seller will want the purchaser to enter into. It provides that the information disclosed to the purchaser about the Target during the due diligence process remains confidential.
- Exclusivity/Lock Out Agreement - these are agreements which are used to try to ensure that the Seller solely negotiates with the purchaser for a period of time. This aims to give the purchaser some protection from another party outbidding them.
- Do your research on the Target if you are a Buyer, look to uncover
all of the potential risks and drawbacks of the deal. This is called a due
diligence exercise and is carried out in respect of the legal, business, tax
and financial affairs of the target.
The legal due diligence usually consists of a lengthy questionnaire for the Seller to complete as accurately as possible. The Seller will need to provide copies of documents requested and referred to within the questionnaire. These documents will form the due diligence bundle. - The structure of the deal will largely be driven by tax considerations. Tax advice should be sought from an accountant and this should be taken from the outset of the deal.
- Principal Documents:-
- Share Purchase Agreement ("SPA") and Tax Deed.
The Buyer's solicitors usually produce the first draft of the SPA and the tax deed and the Seller's solicitors then make amendments.
The SPA is likely to contain:-
- Definitions - Definitions can have a huge impact on the way the SPA operates in practice, so it is important to get these right.
- Main Operative Clause - These set out the key elements of the deal including the terms of payment.
- Completion - A list of the things that must occur at completion. Everyone must know what is and what is not to be handed over on Completion.
- Warranties - The Warranties are contractual promises made by the Seller. They are very important. All Sellers must read them and make sure they are not breaking their promise.
- Indemnities - These provide the purchaser with a pound for pound remedy for any loss he may suffer as a result of a breach. They should only be used if there has been or is likely to be a serious breach of promise. Sellers should try to avoid them.
- Restrictive Covenants - These are used by the Buyer to prevent the Seller from entering into a competitive business or from soliciting customers or employees from the Target.
- Vendor Protection - These are used to limit the rights that the Buyer has in respect of the Warranties and includes clauses such as; the Buyer must make any claim within a limited period of time and the Buyer cannot make claims for trivial amounts. The Seller will also insist upon a monetary limit to any liability it may incur under the Warranties. How much "Vendor Protection" is given will depend upon the bargaining powers of the parties.
- Tax Deed - The Seller is usually expected to give the Buyer an indemnity against any unforeseen tax liabilities that may arise.
- Disclosure Letter
This document allows the Seller to limit its liability under the Warranties by disclosing to the Buyer all matters which are not as warranted. The Seller will not be liable for breach of Warranty to the extent that he has disclosed against it in the Disclosure Letter. Therefore, the Seller should make sure that any problems be they past, present, future or only potential, are fully disclosed to the Buyer (i.e. selling a company is not like selling a second hand car, a Seller needs to ensure that all of the Target's faults, shortcomings and blemishes are fully disclosed). - Ancillary Documents
Such as stock transfer forms, board minutes, director's resignations. The Buyer's solicitors usually deal with the ancillary documents. - Additional Documents
Often Sellers will be retained by the business for a period of time - they will need to sign employment contracts or consultancy agreements (as appropriate) where there are Venture Capital or Investor involvement there will need to be an agreement setting out each party's rights regarding business decisions; sale of shares and repayment or loans.
- Remember Warranties and Indemnities - they are important:
- Warranties - You will probably hear your legal advisor talking about
Warranties and Indemnities quite frequently as these are typically the most
heavily negotiated aspects of the SPA.
In any sale the principle of "caveat emptor" applies (i.e. "let the buyer beware"). The law provides no statutory or common law protection for the Buyer as to the nature of the assets or liabilities he is acquiring. However, in an SPA, the Warranties reverse the principle of "caveat emptor" by allocating the legal risks between the parties. The purpose of the Warranties is to provide the Buyer with a remedy if the statement made within the Warranty about the company later proves to be incorrect and the value of the Target is reduced. - Indemnity - This is an undertaking made by the Seller to meet a specific potential liability to provide a guaranteed remedy for the Buyer.
- Completion
Completion is the day when everything comes together and all of the documents are signed. Completion arrangements can be difficult if there are a number of parties to sign the documents. The original signed documents must be in the hands of the lawyers to complete. Often it is easier to hold a completion meeting whereby all of the parties attend. - Post Completion
After Completion all of the original documents are sent to each party which requires it. The filings are made at Companies House, company books are updated, stamp duty is paid by the Buyer and a bible will usually be prepared containing copies of all of the key documents.
The above is a brief overview and is no substitute for legal advice - now you have a flavour of what you need to do call Tony Forster on 0117 945 3040 or email tforster@metcalfes.co.uk to discuss matters further.
Contact
Tony Forster Head of Company Commercial
Martino Burgess Associate
Natasha Bliss Associate
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This article summarises areas of law on issues we believe may be of use to you. It is provided for information only. It is not a comprehensive review of the subject. It does not constitute legal advice. Accordingly, it is published without responsibility for any loss arising from any action taken or not taken as a result of it.