The process of selling or buying a business can be complex and reliant on multiple things working out. It is much more beneficial to have an experienced corporate commercial lawyer on your side throughout the process. This way, you can rest assured that all aspects of selling or buying a business are completed legally and efficiently.
First steps in selling or buying a business
The indicative offer and confidentiality undertakings
Before a seller discloses any confidential information, they will want to feel comfortable with the likely sale price and the buyer’s ability to pay it.
The buyer will need information in order to formulate an offer. Without a certain amount of non-publicly available information, the buyer may not be able to secure even a preliminary offer of finance (assuming the purchase will need external finance).
So, the starting point may be an indicative offer after a limited disclosure of information. This could be subject to renegotiation if necessary when further information becomes available. At an early stage, the seller should ask the buyer to sign a confidentiality undertaking. Even when a confidentiality undertaking has been signed at the initial stage of selling or buying a business, the seller may still be wary of providing sensitive information until they are confident that the transaction will proceed to completion at an agreed price.
The next steps
Firm offer and term sheet / heads of agreement
Once the buyer feels they have enough information, they should be in a position to agree a firm price for the business with the seller, even if it is still subject to due diligence. At this point, both parties should draw up a document recording the main points of the deal.
On small or low-value transactions, a simple term sheet setting out the price, assumptions behind the price and basic terms of the eventual purchase agreement should suffice.
On larger deals a fuller heads of agreement may be prepared. There is no particular requirement to have a term sheet or heads of agreement. Such documents are rarely legally binding, however, they are an essential part of a well-managed sales process and will be the reference point when the legal agreements are being drawn up and negotiated.
When buying or selling a business which becomes a larger transaction, buyers can often ask for a binding commitment from the seller in the heads of agreement to negotiate only with the buyer for a set period. This is also known as a lock-out or exclusivity arrangement.
Such commitments are often backed up by a seller’s agreement to pay the buyer’s costs if they breach the exclusivity arrangement and sell to someone else.
This tends to be less of an issue on smaller transactions. Owner managers will not usually have time to negotiate with more than one potential buyer whilst also running their business.
When the price and other terms of the deal have been agreed, the due diligence process can start in earnest.
For asset deals, the buyer is not inheriting liabilities except for employees or, in the case of land, perhaps environment liabilities. The buyer will want information on the historic financial performance as well as key contracts that may be taken on. Detailed questions on employees will be raised.
For commercial properties the CPSE.1 enquiries have become the norm. Questions raised on properties will be the usual pre-contract enquiries.
The due diligence process typically involves the buyer sending the seller a list of questions about the company and its affairs, together with requests for various documents. On larger acquisitions these requests may be split between legal, accounting, commercial and tax matters. The buyer may even send its own advisers into the company to conduct investigations. On smaller deals, however, the buyer may choose to review the due diligence information themselves with support of their own team.
Following the signing of a term sheet or heads of agreement the process of selling or buying a business will continue on parallel tracks.
The buyer will continue dealing with issues raised by the due diligence. This may involve requesting further information from the seller or seeking expert advice, whilst the parties start negotiating the Agreement (“SPA”). The SPA is the document which ultimately governs the terms on which the company is sold to the buyer. It is normally prepared by the buyer’s solicitors and negotiated at length between the parties and their advisers.
The SPA has two main purposes:
- Sets out mechanics of the sale of business, i.e. how purchase price will be paid, what contracts will be taken over and how book debts will be collected.
- Protects the buyer from some possible problems within the business, either unknown or discovered in the course of due diligence. It does this through the use of warranties – statements of fact about the business given by the seller. If any warranty proves untrue, and the buyer suffers loss as a result, they may be able to claim compensation from the seller.
Once the SPA and disclosure letter are agreed and due diligence is completed, the parties can compete the deal. There may be other documents to be signed at completion. This could be novations of key contracts, licences to assign leasehold premises, deeds of release and certificates of non-crystallization where a bank of the seller holds a debenture. There may also be forms to change the company’s registered office and accounts date.
Finally, there will be the stock transfer form which performs the task of ultimately transferring the shares to the buyer.
After the legal process of selling or buying a business is complete, the buyer must ensure a proper and efficient handover of the business. This may involve the seller acting as a consultant for a period of time.
Any such consultancy will have been an important part of the sales negotiations.
If part of the purchase price is outstanding depending on company performance after completion, tensions may quickly emerge. These tensions should have been anticipated in the negotiation of the heads of agreement and the SPA. If the company is to be wound-up steps should be taken to do this.
Legal guidance for selling or buying a business
Please do not hesitate to contact the Corporate Commercial department on 0161 975 3805 or fill out your query in our contact form you have any further questions.
Our team comes highly recommended and has worked on projects of all sizes from purchase to sale and everything in between.