This guide outlines the main considerations that apply when buying or selling a business, which can be a detailed and complicated transaction. At Hansells we are able to guide you through every stage of the sale or purchase from; negotiating and drafting heads of terms, carrying out legal due diligence, negotiating and drafting transactional documents and ensuring the acquisition is completed successfully.
This note is intended as a short summary. If you are looking into buying, selling or merging your business with another, you will need to take professional legal and accounting advice.
What are you buying or selling?
The first question is what you are buying or selling as it will usually fall into one of the following:-
- Shares in the company that runs the business; or
- The assets used in the business together with the goodwill of the business.
The buyer acquires the target company with all its assets, employees and the benefit of contracts but also the historic liabilities and obligations of that company. From the outside, very little will appear to have changed and the customers and suppliers may well be happy to continue dealing with the company as it did before. Third party consent to a change of control may however be required in relation to certain contracts (for example, financing contracts and other long-term agreements).
Only the assets and liabilities which the buyer specifically agrees to take are acquired and generally everything else stays with the seller. The exception to this general rule is the employees of the target business will automatically transfer to the buyer under the TUPE regulations. There are a number of requirements set out by the regulations and our commercial team can guide you through the process to ensure compliance. It is also likely that some consents to transfer may be required by significant customers and suppliers, landlords, licensors and others. There may be more disruption to the business than on a share purchase and the buyer may need to build confidence with the customers and suppliers of the business to maintain existing trading relationships.
From a legal perspective, it is generally considered that a share purchase is more favourable for a seller, whereas an asset purchase is more favourable for a buyer. Some form of compromise will therefore be required between the proposed buyer and the seller.
It is important that you set out what you have agreed in principal. The Heads of Terms are usually not legally binding but they summarise the commercial ‘deal’. It is also important to consider whether a Confidentiality Agreement should be entered into in order to protect both parties’ business information during negotiations.
This is when the buyer raises questions of the seller to find out whether there are any hidden problems in the company that the buyer is proposing to buy. Some due diligence is straightforward, for example looking at Companies House records, making sure the company’s statutory registers are up to date, checking employees details etc. Other parts can be complex, for example investigating on -going contracts and property matters. We can be involved in this process to whatever extent you require.
Assuming Due Diligence does not throw up any problems the next step is for a contract to be drawn up. The buying party tends to draft the Contract for the sale and purchase of the shares and the selling party drafts the contract for the sale and purchase of the assets. The Contract will deal with the price, and mechanism for any price variation (depending on net assets etc). It will also set out any restrictions to be imposed on the sellers (to protect the business going forward) and warranties that the seller will be expected to give.
The warranties are usually the main source of disagreement between the buyer and seller when the Contract is being negotiated. Warranties are promises by the Seller which, if they turn out to be incomplete, inaccurate or misleading, will give rise to a claim by the buyer against the seller. The warranties are necessary because the buyer is often buying the business without detailed knowledge of it.
The seller can however avoid liability under the Warranties if the seller gives details of any claims, any liabilities (or anything else that is contrary to the Warranties that are being given). This information will be given in a “Disclosure Letter”, which is in many ways the most important document that the seller has to prepare. The Disclosure Letter often gives the buyer a fuller picture of the business.
Depending on the size and complexity of the transaction it is sometimes sensible for the completion meeting to take place in person with the seller and the buyer present. Very often there are matters to negotiate and any outstanding issues can be most quickly resolved in person. This may however not be possible, depending on location of the parties and their advisers.
There will be a lot of “ancillary documents” for both the buyer and the seller that will be needed, particularly in the sale of shares. There should be records of board meetings held (eg those approving the sale/purchase), forms to be completed for Companies House (eg to change directors and registered office). There will also be changes to bank mandates and sometimes public announcements to be made etc.
Buying or Selling a Business – How we can help
At Hansells we have a dedicated Commercial team to deal with all types of commercial transactions. Whether you are a large company or a small scale business, we can help. Sometimes the more complex transactions are not necessarily those that involve the greatest monetary value and therefore each case is as important to us. We pride ourselves in taking a client focused approach; we will always make sure you fully understand anything you are being asked to sign and will strive to complete the transaction within your desired timescales and in a cost effective manner.
Our commercial team can also provide ongoing commercial support for you and your business. We can assist with terms and conditions of business, contractual arrangements, Companies Act compliance, directors duties and obligations, Shareholders/Partnership Agreements, employment law, commercial property and commercial disputes.
Hansells is a full service firm who are able to offer care and support.
Please contact our Kathyrn Hirst on 01603 751932, to discuss further.