While no two business acquisitions or disposals are exactly the same, there are certain stages of the acquisition/disposal process which are common to the vast majority of corporate transactions. In this article we look at some of those stages.

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Heads of Terms Whether it is set out in a formal document or not, often the first step, once a buyer and seller have agreed in principle the sale/purchase of the business, is to put it down in writing – not least because it provides the basis of instructions to the professionals involved in the transaction.

The key considerations here are:

• What exactly is being bought? If the business is a limited company, then the buyer may simply buy the shares in the company, which will continue to trade largely unaffected by the change in ownership. Because the company itself is being sold, it transfers “warts and all” and so both the assets and the liabilities will remain in the company.

If the buyer is buying assets, it can pick and choose what assets and liabilities are transferred, with the remainder staying with the seller. Clearly it becomes very important to identify precisely what is being bought.

• What is the price? The all important question! Once a price has been agreed, it needs to be clear what assumptions (if any) that price has been based on, and any calculations or adjustments that may need to be made to the price at the point when the business is transferred.

This can often include the preparation of completion accounts which are prepared subsequently by one party’s accountants and then verified by the other party’s accountants.

• Should the buyer be given a period of exclusivity during which time the seller can’t negotiate a sale with anyone else? A buyer will often insist on an exclusivity period before spending time and money on the acquisition process.

Whilst it may not be necessary to put in place a formal heads of terms document, it is always a good idea to ensure you have your advisors in place by this point, as they can help you to ensure that nothing has been missed.

Due Diligence Once heads of terms have been agreed (and the buyer has entered into an appropriate confidentiality undertaking), the next stage involved in the sale and purchase of a business is the due diligence exercise.

Here the buyer and his advisors ask a series of questions of the seller regarding the business to satisfy themselves that they have all the relevant information they need about the business that they are buying and that the proposed acquisition represents a sound commercial investment.

Due diligence is effectively an audit of the affairs of the business – legal, commercial and financial. In business sales, the principle of “buyer beware” applies. There is very little in the way of protection implied by law. Instead, the buyer must rely on its own investigations, and a series of statements to be made in the sale documentation by the seller as to the condition of the business.

The due diligence process can often be a very frustrating time for sellers, who must not only answer detailed questions on their business and dig out historic paperwork and send copies to their advisors but, of course, must also continue to run their business. It can therefore pay dividends for a prospective seller to perform the due diligence exercise in advance (and at their own pace) which allows them to not only collate all the required information, but also rectify any issues that may arise that could otherwise result in a price reduction.

Warranties and Disclosures The due diligence information will often be used to disclose against the warranties in the sale documentation. Warranties are statements of fact about the business to be sold/purchased. Where such a statement is incorrect, the seller should disclose why it is wrong, or risk a claim from the buyer for any loss the buyer suffers as a result of the statement being incorrect. Provided that something is properly disclosed, there shouldn’t be any comeback against a seller.

In addition to warranty protection, a buyer may also seek various indemnities in respect of specific issues identified during the course of its due diligence exercise. Rather than having to prove a reduction in the value of the business as would be the case with a warranty claim, any claim under an indemnity is usually for the full costs of rectifying the issue.

Naturally, a seller wants to limit their exposure to claims following the sale of the business, and so it is usual for a series of limitations to be drafted whereby the seller’s liability may be capped in respect of both the timeframe in which claims can be brought, and also the amount of any claims (both in terms of a maximum aggregate figure, and also a threshold to prevent small claims).

If you would like more detailed guidance and advice in relation to the sale or purchase of a business please contact Andrew Hill, John Wilson or Kate Parker on 01228 552600 or 01524 548494.