- First steps – the indicative offer and confidentiality undertakings before a seller discloses any confidential information he will want to feel comfortable with the likely sale price and the buyer’s ability to pay it. The buyer will need information so that he can 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, 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. This may be a mutual undertaking particularly where the buyer is a listed company.
Even when a confidentiality undertaking has been signed the well-advised seller will be wary of providing sensitive commercial information until he is very confident that the transaction will proceed to completion at an agreed price.
- Firm offer and term sheet / heads of agreement – Once the buyer feels he has enough information, he 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 the 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, the assumptions behind the price and the basic terms of the eventual purchase agreement should suffice. On larger deals a fuller heads of agreement may be prepared. There is no requirement to have a term sheet or heads of agreement and, since 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.
- Lock-out? – Buyers on large transactions will often ask for a binding commitment (known as a lock-out or exclusivity arrangement) from the seller in the heads of agreement to negotiate only with the buyer for a set period. Such commitments are often backed up by an agreement from the seller to pay the buyer’s costs if the seller breaches the exclusivity arrangement and sells to someone else. This tends to be less of an issue on smaller transactions, partly because owner managers will not have the time to negotiate with more than one potential buyer whilst also trying to keep their business running.
- Due diligence – 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. Nonetheless the buyer will want to have information on the historic financial performance as well as on 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. The 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 and the buyer may even send its own advisers in to the company to conduct investigations. On smaller deals, however, the buyer may choose to review the due diligence information himself, with support from his advisers.
- Legal documentation – Following the signing of a term sheet or heads of agreement the process will continue on two parallel tracks. The buyer will continue to deal with any issues which have been raised by the due diligence, which 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:
- Firstly it sets out the mechanics of the sale of the business, such as how the purchase price will be paid, and what contracts will be taken over and how book debts will be collected.
- Secondly, it protects the buyer from some of the 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 of those warranties prove to be untrue, and the buyer suffers loss as a result, the buyer may be able to claim compensation from the seller.
- Completion – Once the SPA (in whatever form) and disclosure letter have been agreed, and the final loose ends tied up in the due diligence process, the parties can compete the deal. There may be other documents to be signed at completion. As well as the SPA and disclosure letter, there could be novations of key contracts, licences to assign leasehold premises, deeds of release from a bank 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, despite all of the above, still performs the task of ultimately transferring the shares to the buyer.
- Post completion – After the legal process has been completed, 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. On a transaction structured with an earn-out (part of the purchase price being left outstanding contingent on the performance of the company after completion) tensions between the interests of the buyer and seller 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.
Please do not hesitate to contact the Corporate Commercial department at Slater Heelis LLP on 0161 975 3805 if you have any further questions.