Thinking of buying or selling a business? There are certain procedures which should be followed to ensure a quick and relatively painless process. The following is just a brief description of some of the terms used and what they mean. We obviously would say this but you really will benefit from instructing rhw at an early stage in the process to protect your position:
- Heads of Agreement
Heads of Agreement are used across the commercial sector. The Agreement summarises the key areas which have been, initially, agreed upon. Though it is not normally intended to be a legally binding agreement, we would advise that legal advice is sought before negotiating this area. Sometimes certain points can be considered as confidential or have a dramatic effect on final terms that someone not experienced may not recognise at the time.
Just to address a few of the common areas that get addressed in Heads of Agreement:
Property: Not surprisingly the property assets or commitments associated with a business can be significant.
Confidentiality: Given that sensitive information (financial and otherwise) will be revealed during the process, the parties involved will often want to put a Confidentiality Agreement in place early on in discussions.
Exclusivity: Many people have experienced the incredibly frustrating experience of being ‘gazumped’ when buying a house. To avoid a much more expensive and frustrating but similar event happening when buying a business, parties will add in a ‘lock out’ agreement to ensure the seller cannot talk to other potentially interested parties whilst negotiations are continuing.
- Due Diligence
Obviously, the purchasing side of any deal will want to know what it is they are actually purchasing and that everything stacks up and all potential legal, contractual and financial risks are known. Enquiries, investigations and full disclosure at this stage is important for the seller as well as the buyer. Anything that allows the process to proceed smoothly is a good thing. Significant issues late on which arise because there has not been disclosure or enquiries have not been dealt with properly can put at risk the entire transaction and/or add significant costs.
- Sale and Purchase Agreement
Effectively this is the main meat of the deal. The document records and lays out both parties obligations. An experienced solicitor can make all the difference at this stage.
One of the key elements to the Agreement is the statement, or warranties, made by the seller and relied on by the buyer. This is effectively an insurance policy, as such and should provide peace of mind for the buyer. It may relate to areas affecting the business such as profitability, what the assets are and condition thereof, key staff, and information pertaining to accounts and tax.
- Disclosure Letter
Few businesses exist without some problems or disputes occurring at some point or another. Any systems involving people or interactions with other entities and businesses will always be at risk of internal or external conflict.
A Disclosure letter is provided where there are other issues extra to the warranties in the Sales and Purchase Agreement that a buyer needs to be aware of. The seller will normally want to make disclosures by way of a Disclosure Letter in order to protect itself from being sued by the buyer for breach of warranty further down the line. Disclosure is a vital part of the transactional process and rhw are able to provide the legal advice you need to ensure you have addressed this area properly.
Nick Richardson – rhw Solicitors llp