What is the process?
1. Find your buyer!
Identify who could be a potential buyer (e.g. competitors, suppliers or existing management team) and approach a shortlist of buyers either directly on through your advisor.
Request that potential buyers enter into a non-disclosure/confidentiality agreement.
Produce a sales/information memorandum identifying:
- Key financial information
- The industry your business is involved in and how long you have been trading
- Details of employees
2. Draw up “Heads of Terms”
This is an agreement in principle on the key terms of the acquisition before beginning the process of due diligence, disclosure and drafting the sale and purchase agreement.
3. Do your due diligence – Legal & financial. Both lawyers and accountants will undertake separate investigations.
Also draw-up sale and purchase agreement and a disclosure letter – these are documents that encompasses the terms of the sale and information about the business being sold.
4. Completion – A meeting is usually held where both parties attend and sign the documentation
5. Post completion
- Announce the transaction
- Make certain filings with Companies House
- Pay any stamp duty
- Attend to certain administrative matters, such as insurance, payroll, PAYE, VAT and pensions.
Get The Business Ready For Sale.
How good is your legal paperwork e.g. terms & conditions, employment contracts, customer and supplier contracts, property leases, data protection, health & safety compliance, regulatory approvals, litigation, employment disputes, internal shareholder disputes, to name a few!
Sort out the issues / get the paperwork in good order, before you go to market – this will make the legal process quicker and therefore cheaper, and will not give the buyer reasons or excuses to reduce the initial offer price, or to reduce the offer price during the due diligence process. In simple terms, if you were selling a house you would mend your roof and fix your boiler before selling…the same principles apply when selling a business!
In this scenario the company is sold ‘lock, stock & barrel’, inclusive of assets, liabilities, employees, contracts, property etc. This option is potentially the most simple from a transactional point of view and broadly two methods exist:
- a newly formed company can be used to purchase the shares
- a buyer could purchase personally
On a basic level, a share transfer form is completed and shares are transferred to new owner(s)
Areas of potential complexity: All parties may not want to exit at the same time, this could be caused by age, value or taxation issues; The valuations of each share group may vary depending upon the size of the shareholding which may effect their desire to sell.
|Cleaner and easier to deal with||Buying all liabilities, both known and unknown|
|No TUPE to consider||Stamp Duty is payable (0.5%)|
|Fewer third parties to deal with, as they still contract with the same party||Harder and more costly from a Legal point of view due to greater due diligence|
|The seller has a clean transaction with less complexity||Not all shareholders may want to sell|
The personal and corporate tax position is cleaner
|Tax issues the balance sheet consist of non trade assets|
In an asset sale, the buyer cherry picks assets and liabilities to purchase. This allows the buyer to leave behind assets or liabilities they don’t want. The selling entity retains any hidden or visible liabilities or problems which allows a selling company to sell off part of a trade or asset and continue to trade unaffected.
A new company is often created with new owner(s) as shareholders to purchase assets. Any amount paid above value of separable net assets is ‘goodwill’ which is shown on the face of the new company’s balance sheet and amortised over its useful life which is typically around 5 years. The downside is that it comes with a lot of administration areas to cover such as company formation, bank account set up and items like statutory administration such as PAYE references, VAT references etc.
From a legal perspective, where an Asset Sale is involved, the following is crucial:
Due diligence – The information gathering process: information memorandum; buyer’s enquiries; data room; accountants’ report
Due diligence findings – These findings will identify the level and areas of protection needed through warranties and indemnities in the Asset Purchase Agreement and any risks that the buyer should avoid completely.
Timing and approvals – A variety of consents and approvals are likely to be required for an asset purchase such as board approval, shareholder approval, regulatory authorities, landlord’s consent, lenders approval, and consent to transfer existing contracts.
Transaction Documents involved include:
- Asset purchase agreement – documents the agreement between the parties for transferring the assets of business to the buyer (traditionally drafted by the buyer)
- Disclosure letter – This letter is prepared by the seller’s solicitors and makes general and specific disclosures regarding the warranties contained in the acquisition agreement. If a seller fails to disclose a relevant matter, in respect of the warranties, he may be sued by the buyer for breach of warranty. A bundle of documents is usually appended to the disclosure letter to support the seller’s disclosures.
- Ancillary Documents – Most ancillary documents are required to perfect the transfer of assets; for example, property transfers and/or lease assignments and/or novations of contracts, assignments of intellectual property and so on.
Employees & TUPE
The Transfer of Undertaking (Protection of Employment) Regulations and its compliance is another consideration as Employees employed by the seller are automatically transferred to the buyer under their existing terms of employment. All pre-transfer liabilities are acquired by the buyer to include claims for discrimination, equal pay, tortious liability (for example, personal injury). It is therefore critical that appropriate indemnities are obtained form the seller and not forgetting that there is an obligation on both the seller and the buyer to inform and consult the employees on the proposed sale.
|Specify which assets you are purchasing||SDLT rates higher than stamp duty where assets include land or buildings (range from 2%, 5%, 10% and 12%)|
|Buyer can get around minority shareholder not willing to sell||Re-titling assets in the name of the buyer/novation of contracts, not required with a share purchase|
|Certain lengthy legal processes can be avoided if the assets being acquired do not require specific transfers such as lease assignments, hire purchase contracts and trade registrations||Often have to deal with a close down of the company|
|Due diligence more straightforward (and therefore cheaper)||Third party consent (Landlord, customers, suppliers, equipment leases etc.) required for contract assignments.|
|Fewer warranties and indemnities required by the buyer||If the assets being acquired are financed or are owned by a third party the legal process is more complex – issues of consent arise|
|TUPE /Redundancy costs usually apply|
Company Purchase Of Own Shares.
This takes place when a company buys shares from current shareholder and substantial amounts of cash are generally needed on balance sheet to complete the transaction.
A company buys shares from current shareholders, this can be:
- To buy out an individual shareholder
- To reduce all the shareholders individual holdings to release capital
- Redistribution of the ownership of the company between the shareholders
Company Purchase of Own Shares – “CPOS” is often linked to new share issue which allows the introduction of an MBO (Management Buyout) team or financier. E.g. management needs to increase expertise within the board. If the exiting owners are in dispute or have different goals (retirement time, change in direction etc) then CPOS works well as one party can exit while the business continues. This would require a formal valuation and HMRC agreement; and strict capital/creditors protection which is laid down in the Companies Act.
For more information or a FREE initial, no obligation discussion contact Andrew Kerr.