How to buy or sell a business or company
Admin, 1st November, 2017
When buying or selling a company or business, there are no second chances. So you need to do it properly.
He explains the legal steps you need to take when you’re considering buying or selling a business.
Getting the right balance
Whether you’re buying or selling, it’s important to find the right balance of risk and reward. People go into business to make money and increase wealth by making a profit through trading and/or selling that business.
However, all business ventures have inherent risks and the sale process is about how that risk is shared between a buyer and a seller by reference to their periods of ownership.
As a buyer, you’ve agreed to a pay a price based on what you are told. If what you are told is wrong and means the value you have paid is too much, you’ll be kicking yourself!
Had you known all of the facts at the time, you would’ve paid less or not gone ahead at all.
After all, if you paid good money for a pint in the pub and when that pint was pulled it was “off”, you’d want your money back. Or a new pint!
As a seller, you’ve run a business to the best of your ability (hopefully!) and agreed to sell at a certain price based on performance/value at that time.
If, after the sale, the buyer makes bad decisions or there’s a downturn, you wouldn’t be happy having to hand some or all of your retirement fund back to the buyer just because they argue that you “sold them a lemon!”
Nobody is ever going to buy or sell a business completely risk-free. But to get the right balance of risk, you should take professional guidance.
A solicitor can help you manage the risks, give you options on how to minimise those risks and explain the implications of the decisions you make to ensure each one is the right one for you.
It’s also a good idea to take that advice early, and when initial negotiations begin. All too often clients agree initial terms of a deal without taking advice.
This can result in parties committing themselves to terms they don’t necessarily appreciate the implication of.
Or handing over critical business information to a buyer to find the buyer then walks away with enough information to set up in competition.
Or incurring significant costs on a purchase to then find the seller has been negotiating with another party and does a deal with them!
Taking early advice on heads of terms, confidentiality agreements and exclusivity agreements will avoid this.
It also helps to ensure the ongoing process is smoother and, in the long run, cheaper!
Process and documents
The process and principal documents relating to sales and acquisitions can be long and complex and for first timers can be daunting.
Having a brief understanding of what’s involved before you get into the detail can help.
It ensures you can concentrate on the important commercial points and risks while still getting on with your day job, and leaving the lawyers to it.
The purpose of due diligence is to investigate the assets and liabilities of the target business. And it’s an important process for both buyer and seller.
It gives you the opportunity to kick the tyres before buying and get information on risks associated with the target business.
That way, you can either renegotiate the price being paid or ensure you get the legal protection you need to try to avoid those risks.
It gives you the chance to lay all cards on the table and make the buyer aware of risks that, if not known to them before the sale, could lead to claims being brought against you (and you handing back cash to the buyer) after completion.
The acquisition agreement sets out the agreed terms governing the transaction and the mechanics of the deal. For example, the parties involved, the amount to be paid, the timing of the completion and any consents or approvals required before completion.
It will typically contain a number of provisions designed to protect the buyer, including restrictive covenants and warranties.
Warranties are contractual promises given by the seller about different aspects of the target business. For example, that it owns all the assets and there are no disputes with third parties.
If they’re untrue, the buyer can sue for damages giving them an opportunity to effectively adjust the price paid after completion. So they can be comfortable that overall, they’ve paid the right price.
For sellers, the acquisition agreement will contain limitations.
These will limit the claims that can be made under warranties ensuring that, amongst other things, your risk is limited to issues relating to their period of ownership.
And the risk of the business failing after completion due to, say, bad management by the buyer, remains with the buyer.
The disclosure letter is a document that must be read in conjunction with the warranties in the acquisition agreement.
From a seller’s perspective, this is an extremely important part of the process.
The disclosure letter sets out matters which render any of the warranties (the promises referred to above) untrue and runs alongside the due diligence process.
A buyer can’t make a warranty claim for anything disclosed in this letter. So it shifts the risk of issues that relate to the seller’s period of ownership back on to the buyer.
This is on the basis that the buyer knew about the issue before completion, but proceeded anyway. So both parties need to treat this process seriously.
If the seller doesn’t, they may be faced with claims at a later date.
If the buyer doesn’t, it may find it has bought that bad pint and can’t get a refund!
Need advice? We can help you
Please call Paul Plaxton on 01482 324252.
Or email Paul here.
You can find out more about our Company & Corporate services here.
This blog is only a brief summary of what can be a long, detailed and sometimes frustrating process with much toing and froing negotiating documents and deal terms.
It’s important to get clear, professional advice to make sure you buy or sell on the right terms, and avoid potentially lengthy and costly issues in the future.
After all, you’ll only buy or sell it once!