Company Will – do you have one and do you need one?

Your business partner of 20 years has just died. Apart from the immediate cash-flow crisis that you’re facing, there is a fundamental question over the future of the business as a whole.

  • Who will have control of his share?
  • Will the share be available to you to buy?
  • Will you be able to afford to buy the share?
  • How will the price of the share be calculated?

What is a Company Will?

A Company Will is a “Cross-Option” agreement and regulates where their shares will go if a shareholder dies and how this transfer of shares will be financed.  The objective is to enable a business to continue after the departure, by avoiding the dilution of the shareholding to people previously outside of the company.

Can you afford not to have one?

Warranties (sellers & buyers)

In brief, a warranty is a statement in a contract by way of assurance that a particular state of affairs exists or does not exist.  It is designed to be relied on by a buyer and should be correct.  There are various ways in which the warranties can be qualified but this will depend on how streetwise the seller (or sellers’ lawyer) is and how the negotiations progress.  A warranty should always be correct and if as a seller you are not entirely convinced that a warranty is correct, then MAKE A DISCLOSURE AGAINST IT (see disclosures) – if in doubt, disclose. If there are 2 golden principles for a safe journey through the commercial jungle for buying and selling, this is one of them. The other is….

KISS (Keep it simple, stupid) anything that moves and quite a few things that don’t! (sellers & buyers)

One of the biggest failings of the typical business deal is that things are over-complicated. Things are rarely as complicated as some may maintain and, whilst we don’t want or need to think in terms of “dumbing down” any professional role, the trick, as is frequently the case in life, is to get the balance right.

Across the board (sellers & buyers)

Apply this rule to pretty much everything in life. If you can get the basics right, you can build the detail in later.

Indemnity (sellers & buyers)

The general rule is that an indemnity is a bad thing!  Think of an indemnity as a blank cheque and you are probably not far wrong.  If to bring a claim for a breach of warranty you need to jump through a number of hoops, with an indemnity you only need to prove that the circumstances covered by the indemnity have come about.  Only give an indemnity if you have tried really hard to avoid doing so!

Completion Accounts (sellers & buyers)

These may be relevant when a company changes hands rather than the core assets of a business. Because the company is transferred “warts and all”, whilst the due diligence process is intended to identify the warts so the buyer can then decide if he or she still wishes to proceed, the precise effect of the various warts may not be known until after completion.

To get round this problem, most company deals are struck based on an assumption[1] about the balance sheet value of the company taking account of a number of factors. The Completion Accounts will then be prepared to crystallise all these variables and to provide a final balance sheet value for the company.

The target balance sheet value will be the amount that the parties “aim for” when the deal is struck and can be affected by various issues such as outstanding tax and other creditors, timing of the payroll payments, value of cash at bank and debtors.

 If the target balance sheet value is neutral i.e. zero, then the usual provision will require the buyer to pay pound for pound any excess in the Completion Accounts balance sheet above zero and for the seller to refund any deficit below zero, again on a pound for pound basis.

Guarantees (sellers)

If you are selling a business, never forget any guarantees that you may have given in your capacity as a company director.  You should provide for the buyer obtaining a release of those guarantees or preferably negotiate for this yourself before completion or exchange.

Guarantees may have been given not just for bank facilities but also in equipment rental or leasing contracts (including vehicles) and you must not forget premises leases. An alternative to a personal guarantee for a property lease is a rent deposit, normally of a sum equivalent to 3 or 6 months rent.

Forecasts (buyers)

If you are buying a business, get as much information as possible by way of forecast as part of the due diligence process..  However bear in mind that the sellers (if properly advised) will be very reluctant to guarantee or warrant the accuracy of the forecast.  If you are selling never give any assurance in writing about a forecast, which should be for information or illustration only.  Any guarantee or forecast should be built into the deal through an earn out provision (see earn out).

Publicity (sellers & buyers)

Depending on whether you are buying or selling, there will probably be strong requirements from buyer or seller to keep publicity to a minimum.  Any publicity should be agreed in advance and this is an area that can go horribly wrong.  There should be a separate clause covering this by way of a pre-agreed announcement and the form of wording to be used. The announcement should ideally be agreed before commitment and attached to the binding contract.

Guarantees Re-visited (buyers)

Would you willingly give a guarantee for something out of your control or someone else’s debt?  If not, then don’t and don’t give any sort of indemnity for this either.

Staff (sellers & buyers)

The rules on staff get tighter and more troublesome every year.  As a starting point, assume that any employees (and a good deal of self-employed/contractors) will transfer to the buyer whether the parties intend this or not.  There are substantial exceptions but this is a good starting point and if you work on the basis that staff will be a problem, you will probably not go far wrong. This whole issue is analysed in more detail under TUPE below

Guarantees Re-visited (again) or when is a limited guarantee not limited? (buyers)

Most bank guarantees will make you liable even if the bank does not actually make a claim against the original debtor.

There will normally be a cap or ceiling in most guarantees required by banks. This cap will invariably be expressed as an exclusive sum (or, more accurately, the cap is expressed as a sum in addition to which certain other sums are still due to be made)and so you need to look carefully at what can be charged on top of the specified maximum. This will normally be

  • Interest
  • Bank charges
  • Bank costs of collection and enforcement. The effect is that there is potential liability of several thousands of pounds on top of the stated maximum.

[1] Now, before you sigh and leap in with “but, you’ve broken your golden rule against making assumptions!”, you need to know that this assumption is different, it’s based on certain provisions in the sale agreement and so will be backed up with performance factors. Oh, that’s all right then…


Part Four will follow in the next few days. In the meantime if rhw’s Commercial Team can help you please do contact them on guildford@rhw.co.uk or call 01483 302000