Buying or selling a business – the legal process
During today’s blog we will be providing some guidance around buying or selling a business.
‘The secret of getting ahead is getting started. The secret of getting started is breaking your complex overwhelming tasks into smaller manageable tasks, and then starting on the first one.’
– Mark Twain
The process of buying or selling a business can involve a significant amount of time and determination on the part of both the buyer and seller.
The degree of legal input which may be required by each of the buyer and seller to guide them through the process varies, depending on the circumstances. Relevant factors are likely to include the type, size and value of the business; the relationship between the buyer and seller, if any; and the approach that the buyer and seller (and particularly the buyer’s solicitors) would like to take to the transaction.
But, by way of outline, and with the aim of breaking down the legal aspects of the sale process into manageable tasks, the steps below set out the legal input which may be required.
Non-Disclosure Agreement – Before they begin discussions (or as soon as possible thereafter) many sellers and buyers want to enter into a Confidentiality or Non-Disclosure Agreement (an NDA). The aim of this is to require both parties to keep confidential any information that they learn about the other’s business during the sale process.
Heads of Terms – Following initial discussions between the buyer and seller, it can be helpful for them to agree Heads of Terms in which they agree in principle their expectations for the deal. They are not usually legally binding. The following points might be covered:
a) What exactly is for sale? If the business is a company, the seller may want to sell its shares in the company (a Share Sale). A buyer may prefer to buy assets which the company holds (an Asset Sale). If an Asset Sale, what assets make up the business? Are they any assets or liabilities which should or shouldn’t be included in the sale?
b) How is the business going to be valued?
c) How is the price going to be paid?
d) How is the buyer funding the purchase?
e) Is the seller required to deal with the buyer exclusively (or can the seller continue to negotiate with other potential buyers)?
f) Is there a time period in which the sale must complete?
Due diligence – Before committing to buy the business, the buyer is likely to want to understand more about it. The process by which the buyer does this is called the due diligence process. Usually this involves the buyer (or its solicitors) requesting information about various aspects of the business which is for sale (its finances, contracts, property, employees and environmental compliance, for example) and the seller (or its solicitors) responding with information in reply. The seller’s solicitor will usually compile a Disclosure Bundle containing information which has been requested, and the buyer’s solicitors will go through it and report to the buyer on what has been received. The buyer may ask other advisors – particularly its accountant – to advise on non-legal aspects of the information received.
The sale agreement – This is the key agreement in which the buyer commits to buying, and the seller commits to selling, the seller’s business. This needs to be tailored to suit the circumstances of the sale and will usually require some negotiating. If Heads of Terms were agreed at the outset, they will provide a helpful starting point for what it will include.
A particular point of focus for both buyer and seller will be the warranties included in the agreement. Warranties should be factual statements which the seller commits to about what is being sold (whether shares or assets). If, after the sale completes, the buyer believes that a warranty which was given was not correct, the buyer may have a claim against the seller. In order to avoid such a claim, the seller will need carefully to consider whether each warranty can properly be given, and may need to limit them. These limits would usually be set out in a Disclosure Letter, which would also need to be agreed by the buyer.
You might also hear the phrase ‘warranties and indemnities’ as if they mean one and the same thing, but they are different. An indemnity is a commitment by the seller to cover certain liabilities or losses which the buyer may incur after completion. If indemnities are included in the sale agreement these are also likely to require negotiation.
Other sale documents – It is usual for other legal documents to need to be prepared before the sale goes ahead and they vary depending on the transaction. By way of example, where a freehold property is to be transferred to the buyer, the Land Registry transfer documents will need to be prepared for signature. Unlike the sale agreement, these ancillary documents do not usually need to be negotiated in detail, but they need to be accurate and so each party’s solicitors will need to review and approve them.
Completion – In a business sale, completion usually takes place simultaneously with exchange, so that there is no gap between exchange and completion (as there typically is in a residential property transaction). In that case, once the sale agreement is signed and dated by both parties, any part of the purchase price which is payable by the buyer on completion will be payable, usually to the seller’s solicitors…and both parties can breathe a sigh of relief that they have completed the deal.
Follow-up – There is always some follow-up administration to be done after completion. The seller’s solicitors will transfer the sale monies received at completion to the seller’s account. The solicitors acting for the seller and the buyer will send each other their client’s signed documentation, and arrange the safekeeping of the documents they retain. Usually there will be follow-up filings to be made as well, for example with Companies House and the Land Registry.
At Barker Gotelee we try to take a commercial and pragmatic approach and to make this process as straightforward as possible for our clients. If you would like to discuss a potential sale or purchase of a business, please contact either Clare Richards or Liz Gifford in our Corporate & Commercial team.
Clare and Liz offer a one-hour business advice session for a fixed fee on buying or selling a business in which they could provide initial advice to you on matters relevant to your particular deal and identify the legal input which is likely to be relevant to you.
Liz Gifford is a solicitor specialising in charities law in the business services department at Barker Gotelee Solicitors in Ipswich.