Buying or Selling a Company
There are a host of things to consider during the sale of a business. Whether you are the buyer or the seller, steps need to be taken to protect confidentiality, ensure transparency and safeguard the future of the business and employees, whilst making sure the transaction proceeds smoothly.
From Due Diligence to Disclosure Letters, heads of terms and confidentiality agreements, rhw solicitiors commercial team are able to advise and assist at every stage.
Select the links below for more information:
who does what?
When a decision has been made to buy or sell a business, then there are some well-established best practices that need to be followed to ensure a smooth transaction.
The purchaser will need to carry out "due diligence" and investigate the finances and assets of the company they wish to purchase, whilst the seller and his legal team should prepare and issue the draft contract where there is small business sale of assets. However, in bigger deals or where the buyer is acquiring shares in a company, the buyer and his legal team will deal with this.
heads of terms
Sometimes known as 'Letter of Intent' or 'Heads of Agreement', this is a document that lays out the key points of the proposed transaction and should not go into detail that will be contained in the full Agreement.
Whilst Heads of Terms are normally expressed to be non-binding, certain clauses may be of immediate binding effect, for example costs and confidentiality.
gentlemen's agreement
Time was when all you needed to seal a deal was a handshake and a "Gentlemen's agreement". Whether that ever was actually the case is a subject for discussion, however at best, a gentlemen's agreement is only as enforceable (or unenforceable) as any other verbal contract... so why take a chance?
The risks of such a verbal contract far outweigh the rewards and the bottom line is that you really should not rely on them - get it in writing! To do this, it may not be necessary to go to an "all singing all dancing" contract - simple bullet points of what has been agreed may well be sufficient.
confidentiality agreements
Do I need a Confidentiality Agreement? If you need to ask this question then the answer is almost certainly "yes". Also known as Non-Disclosure Agreements (NDA) these documents are designed to protect you from the dissemination of sensitive or confidential information during negotiations with prospective buyers.
It is recommended that a full Confidentiality Agreement is drawn up and signed by both parties at the outset of any negotiations to avoid any breakdown in the relationship due to misinterpretation of what is confidential and what is not.
It will also protect and give you recourse for litigation should your confidential information be used for purposes outside of the stated terms.
due diligence
Once the terms of a business sale have been agreed then it is appropriate for the buyer to undertake the process of Due Diligence. It is important as the seller that a Confidentiality Agreement and indeed Heads of Terms are in place before this process begins.
A due diligence investigation should reveal the current trading position, situation with business contacts and commitments, litigation, the accounts position and tax liability.
A warranty acts as a checklist for the seller and gives the buyer a certain level of protection by clarifying the state of affairs within a business. These are vital elements within the purchase or sale of any business and rhw can advise and assist at every stage of the process.
disclosure letter
These letters exist in deals for the sale of assets or shares in a company, although they are normally more relevant in a share sale. The idea is for the person giving the warranties to "flag up" in a Disclosure Letter any areas where "disclosures" need to be made.
For example, if the warranties say that there are no employment claims known to you as the seller and you have just received a letter of proposed claim, then you would make a disclosure of this. The Disclosure Letter must also give enough detail so that the buyer can assess the risk and make decisions.
shares vs. assets
There are a variety of reason Why buying shares in a company as opposed to buying assets can be a prudent
- Tax - Stamp Duty (0.5%) not SDLT
- You will buy the Company warts and all. Liabilities, tax etc all come with it.
- Compare the "cut-off" day of completion with an assets acquisition.
- Hence the need for thorough due diligence (tax and accounts especially).
- Sale of shares is normally driven by tax issues from the seller. CGT 10/18% as opposed to double tax if Company sells the business (Corporation tax) and then distributes out to sellers (dividends and Income Tax).
- Possibly cheaper tax bill for shares but higher legal fees and higher due diligence fees.
- Main areas of risk are the "warts and all" concept and making sure that all areas are familiar and that unknowns become known.
- Share Sale Agreement will be more complex than an assets agreement with more extensive warranties.
- Warranties and Indemnities will be required from a seller, the extent will depend on negotiating strength. Indemnities (great to receive, bad to give) normally flow from a due diligence report and identify specific areas of concern and risk for a buyer.
TUPE
The revised Transfer of Undertakings (Protection of Employment) regulations came into effect in 2006 and are a process that is automatically triggered when the assets of a business are bought or sold and responsibility for employees, both direct and contracted, are inherited by a new employer.
The processes are designed to ensure continuity of the terms of employment from one employer to another, or to provide a forum through which negotiations of terms or disputes can be mediated and resolved.
The TUPE regulations are complex, however rhw have vast experience in this area and the employment law team stand ready to advise and assist you on this matter.
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