The main priority for any Seller is to complete the disposal as quickly as reasonably possible, to secure the sale monies and to avoid any warranty or other claims from the Buyer. In that context the following primary issues should be examined.
Share or Asset Sale
Where the Business is being operated as a limited company, a preliminary issue is whether to sell just the assets of the Business or the shares of the Company. Primarily, tax consequences drive this and you should take specific advice from your accountants. There are other considerations:
- Opting for an asset sale means that you are left with a shell Company with no assets and some liabilities/creditors. There will be the cost and inconvenience of liquidating this Company.
- Selling the Company means selling assets and liabilities. The Share Purchase Agreement contains far more Warranties and is more heavily negotiated. The financial/legal due diligence exercises are also more robust as liabilities need to be identified.
- A share sale may appear cleaner as we simply have a new owner of the shares in the Target. You avoid issues such as the transfer/novation of key customer contracts and employee issues are simplified as TUPE is avoided. But you have different considerations as there is a change in control of the Company and key customer contracts of the Target may be terminated on this event unless the consent of the contract holder is obtained.
Confidentiality Agreement and Heads of Terms
The Buyer will seek to commence a full due diligence exercise in respect of the Target. The aim of the Buyer is to find out as much information as possible about the Target and this process flushes out any legal/ commercial issues at an early stage.
If you are being bought by a competitor, and have got concerns about disclosing confidential information, you should put in place a Confidentiality Agreement. This imposes an obligation on the Buyer to keep all sensitive information strictly confidential and to only use it for the purpose of the purchase and to only circulate it to its professional advisers and bank. If you are worried about key staff/customers being poached, you may also want to insert restrictive covenants into the Confidentiality Agreement.
The Heads of Terms set out the key commercial terms in a disposal, for instance the purchase price, when it is being paid, conditions precedent and the date of completion. The Heads are subject to the provisions of the sale and purchase agreement, but they can be persuasive when you have arguments with the Buyers solicitors later on.
The Heads often include an Exclusivity Period for the Buyer i.e. a period of a few months up until the completion date. Obviously the Buyer will not want to rack up professional costs only to find that you sell to somebody else. Conversely you do not want to be tied in with a Buyer who moves slowly or is facing funding difficulties. You may therefore require a non-refundable deposit from the Buyer. It can also be useful to put in some qualifiers on exclusivity; e.g. cancellation if the Buyer breaches the Confidentiality Agreement or tries to reduce the purchase price.
The Buyer will require up to date and accurate information about the Target before it exchanges the Asset Purchase Agreement or the Share Purchase Agreement.
The general approach is to be as comprehensive and open as possible with regard to Due Diligence. If there is any doubt or incomplete information on any issue, the Buyer will often seek to either reduce the purchase price for the Target or even retain some of the purchase price (e.g. 5 or 10%) in a retention account pending investigation/ resolution of the relevant issue. Effectively part of the sale consideration is locked away and cannot be accessed by the Seller.
The tactical approach may vary but in order to protect the Sale Consideration, the general approach is probably to be as upfront as possible so there are no nasty surprises for the Buyer.
When the Due Diligence exercise is nearing completion, the Buyer’s solicitor will produce the Asset Purchase Agreement/ Share Purchase Agreement. As well as documenting basic obligations, including the purchase price, payment structure and restrictive covenants, the Buyer will also require the Seller to give Warranties relating to all aspects of the Target. The purpose of Warranties is to provide the Buyer with a legal remedy after exchange of contracts if the Company has hidden liabilities.
A key document for the Seller is the Disclosure Letter. This document restricts the ability of the Buyer to bring a warranty claim if there has been disclosure of information relating to the statements contained in the actual warranties. Effectively, the risk in relation to matters disclosed is then transferred from the Seller (who is giving the Warranties) back to the Buyer since the Buyer is accepting the principle that he is buying a Business subject to matters disclosed. It is vital to go through each warranty in detail and insert the relevant specific disclosure in the Disclosure Letter.
Even if there are arguments as to whether there may potentially be a warranty claim, drafting of comprehensive sellers protection clauses can also avoid warranty claims. These are numerous and include time bars and de minimis restrictions.
If the disclosure and due diligence process is expedited comprehensively, warranty claims are rare.
These are only of course general guidelines when approaching a disposal or exit. Each sale is different and throws up different issues. There is no doubt that specific advice is needed on every transaction whether you are selling for £500,000 or £5 million.
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