The decision to buy or sell a business can be a tough one, and may be based on a number of differing financial or commercial factors. A sale and purchase transaction has the potential to be a complex process, so it is vital to have a comprehensive strategy in place.
Firstly, a buyer will need to consider the price it can afford to pay for a business and the size and type of business it wishes to purchase. Once this has been established and a buyer has identified a target company which is willing to sell, it can begin to assess the value of that business and the method it wishes to use to acquire the company. It is at this point that the buyer and seller will usually instruct their own independent legal advisers and specialist corporate finance accountants to act for them in the transaction.
Methods of buying a business
A person or group of people buying a business can either purchase the individual company and assets, which make up the target company, or, alternatively, can acquire the shares of the target company.
If the buyer purchases the business and assets, only certain assets (and certain liabilities) are acquired by the buyer. If the buyer purchases the shares of the company, then it acquires the entirety of the legal entity and everything in it – the company’s assets, liabilities and obligations.
Heads of terms
Each party’s solicitor will then negotiate and agree in principle the key terms of the deal. These are incorporated in a document known as the Heads of Terms, which can be non-binding legally or partially binding, depending on the nature of the transaction. Usual terms found in such an agreement, include:
- What the parties are intending to buy and sell;
- The consideration for the purchase and when this will be paid;
- Conditions of the parties completing the transaction; and
- A timetable for completion.
In some circumstances, a buyer may also want to enter into an Exclusivity Agreement with the seller, whereby the seller agrees not to negotiate or deal with other prospective buyers for a defined period of time.
Equally, a seller may want the buyer to enter into a Confidentiality or Non-Disclosure Agreement, which restricts the buyer’s use and disclosure of information relating to the seller’s company that it comes to know during the transaction. The terms of such agreements are often subject to much negotiation between the parties’ respective solicitors.
Once the preliminary documents have been dealt with, the buyer begins the process of due diligence. This involves a forensic examination of the company’s books, paperwork and assets in order to assess the financial, legal and commercial strengths and weaknesses or risks within the company.
During due diligence, issues with the target company may be identified, such as discrepancies in their statutory books, pensions provision or employee documentation not being up to date or to the required standard. It is important that these issues are either rectified or dealt with in the Sale and Purchase Agreement before the sale is finalised to avoid the buyer running into any problems in the future, and also to mitigate any future risk to the seller after the company is sold.
The process of due diligence involves the seller answering many enquiries submitted by the buyer’s solicitors and disclosing any relevant information and documentation. Depending on the size of the target company, there can be hundreds of documents that need to be reviewed by various different parties, such as accountants, tax advisers and specialist solicitors.
At Nelsons we use what’s called a data room, which is a secure digital storage facility where these documents are uploaded and reviewed by the relevant parties in a password protected, but easily accessible, online portal.
Sale and purchase agreement
Once due diligence has concluded and the buyer is happy to proceed with the transaction, the respective solicitors will draft and negotiate the principal and ancillary documentation necessary to legally effect the sale and purchase.
The principal document is known as the Sale and Purchase Agreement. This is customarily drawn up by the buyer’s solicitor and contains the commercial terms and conditions of the transaction and warranties/indemnities from the seller in respect of any key matters over which the buyer requires protection from risk.
The Sale and Purchase Agreement is often a lengthy document, so it is important to have an experienced corporate law team on your side who know what to look for to assist you in reaching the best deal possible. The level of legal experience that the buyer and seller have on their side makes an enormous difference to how smoothly the process goes.
As well as reviewing the Sale and Purchase Agreement drafted by the buyer’s solicitor to ensure that it reflects their understanding of the terms of the transaction, the seller’s primary focus at this stage will be producing a comprehensive Disclosure Letter – a document which contains statements disclosing information against any warranties being given to the buyer. This document acts as an ‘insurance policy’ of sorts, and mitigates the seller’s risk of being pursued in the future for breach of warranty by the buyer. A good corporate solicitor will guide the seller through this process to ensure that disclosure is properly and comprehensively tackled.
Concluding the sale
After all of the principal and ancillary documents have been agreed between the parties, the parties will sign and date the documents and carry out the steps set out in the Sale and Purchase Agreement to complete the transaction.
After completion, there will be various formalities and filings that need to be carried out by the parties. For example, updating Companies House registers, paying stamp duty on any share transfers and dealing with administrative matters.
Selling or buying a business? – How Nelsons can help
The Corporate services team at Nelsons, combined with the wider specialisms and expertise within the firm make us the perfect choice for anyone thinking about, or already in the process of, buying a business or selling a company.