The key stages of buying a business
When buying a business there are a number of key stages to the transaction that the buyer will typically go through, including considering the transaction structure, agreeing any preliminary agreements with the seller, undertaking due diligence, negotiating the main purchase document and any additional documentation, signing, exchanging and completing the purchase.
Structuring the purchase
The buyer will need to consider a number of points before agreeing the purchase structure, including:
- Whether the purchase will be a share purchase or asset purchase. A buyer in a share purchase will acquire the shares of the target company that owns the business, as opposed to a buyer in an asset purchase who will acquire the assets comprising the target business from the seller. Each purchase structure has its pros and cons. When buying the shares of a company, the buyer will acquire all the company’s assets, liabilities and duties. In an assets purchase, the buyer will only acquire the agreed assets, liabilities and duties.
- How should the target business be valued?
- How will the buyer finance the transaction? Will the full purchase price be payable in cash on completion, or will the cash consideration be deferred or payable in instalments subject to certain conditions being met. Alternatively, will another form of consideration be used?
- The tax structure of the transaction. It is likely that the seller will have taken advice from their accountants on how to structure the transaction most tax efficiently from their perspective. The buyer should also take tax advice from its accountants about the tax implications of the transaction structure.
It is fairly common, and often very useful, for the main terms of the purchase to be set out in a heads of terms or letter of intent. Heads of terms are primarily a non-binding document (although terms such as exclusivity or costs provisions can be binding) which details the key terms of the transaction agreed between the parties. It is also fairly standard practice for the seller of a business to require the buyer to sign a confidentiality agreement (sometimes known as a non-disclosure agreement), requiring the buyer to keep all information about the seller’s business which is provided during the transaction process confidential.
Due diligence is the process by which the buyer of a business raises enquires with the seller, with a view to obtaining as much information and documentation about the seller’s business. It is essentially an information gathering activity.
Due diligence is typically split into legal due diligence and financial due diligence. The buyer’s solicitors will create a due diligence questionnaire to be answered by the seller and their solicitors. The aim of due diligence for the buyer is to establish a full picture of the business they are buying and, in particular, to uncover any issue which may reduce the value of the target business or lead to claims or other issues in the future.
Financial due diligence will typically be undertaken by the buyer in conjunction with their accountants in order to analyse recent financial information on the target business and examine its systems and internal financial controls.
Replies to the due diligence questionnaire should be carefully considered by the seller as they form part of the representations relied upon by the buyer.
Transaction and ancillary documents
The transaction structure agreed between the parties will dictate the documents required. Where the purchase is structured as an asset purchase, the document used will be called an asset purchase agreement. This sets out the assets of the target business being purchased by the buyer and, equally as importantly, details those liabilities which are and are not being taken on by the buyer.
Where the purchase is structured as a share purchase, a share purchase agreement will be used. The share purchase agreement sets out the terms upon which the owner(s) of the shares in the target business will transfer their shares to the buyer.
Various clauses common to both documents are likely to be the points most heavily negotiated by the solicitors acting for the parties, including:
- Consideration; how and when it is paid of satisfied.
- Warranties; these are statements about the state of the target business and are likely to be more detailed in a share sale, save that on an asset sale the question of employees transferring to the buyer are likely to be thoroughly detailed.
- Contracts; how they will be assigned to the buyer on an assets purchase. On a share purchase the contacts do not need to be assigned, however they should still be checked for change of control provisions which may affect their transferability.
- Restrictions on the seller post completion.
- Property; if/ how it will be transferred and whether consent of third parties is required.
Additional documents are likely to be required to perfect the transfer of certain assets, such as property transfer documents for asset purchases or stock transfer forms for share purchases.
Signing and exchange of contracts
Most transactions will exchange and complete simultaneously, although others can have an agreed gap between exchange of contracts and completion.
Where the buyer (or the seller) is a company, the directors of the company should meet to approve the terms of the transaction documents, authorise directors to sign the documents and resolve to exchange contracts.
Completion and post completion
On completion of a purchase the buyer will pay the consideration (aka the price) to the seller and the business assets or shares (as applicable), or the part of it due on completion, will be transferred to the Buyer. Typically there will be a number of documents which need to be delivered by the seller to the buyer on completion. A list of these documents will normally be contained in the asset purchase agreement or share purchase agreement. Following completion the buyer will need to deal with multiple matters, including contacting customers and suppliers of the business, dealing with administrative matters (insurance, payroll etc.), paying any stamp duty (on shares) or SDLT (on property) payable and, if needed, dealing with necessary corporate filings.
Wannops would be happy to advise buyers and sellers on both assets and share purchase/sales and variations of these transactions such as MBOs, MBIs, mergers. Please contact our company commercial team for assistance.
This article does not constitute legal advice and reliance should not be put upon it without client contact with our company commercial team.