Are you thinking about buying or selling a business? Are you unsure of what steps may be involved in such transaction? If so, the guide below will take you through the main steps of buying or selling a business. It also provides a brief insight of what each step entails, and what may be expected of you.
Heads of Terms (sometimes referred to as a ‘letter of intent’)
This document is a non-binding document which forms the basis of the transaction and how the parties wish to proceed. In short, it sets out what deal has been proposed and agreed; as well as the structure of the deal and its terms. Main provisions can include: details of the buyer and the seller, purchase price, payment information, any special conditions etc.
It is likely that exclusivity and confidentiality agreements will be prepared and signed by the buyer and the seller before embarking onto due diligence. This is to ensure that the Seller does not engage in negotiations with other potential buyers (former); it also ensures the Buyer keeps all the information received from the Seller confidential (latter). Such items are often dealt with as part of the heads of terms.
This is an information gathering process. As a buyer you will want to know as much information about the business you are going to acquire. Such information is obtained through the submission of a due diligence questionnaire to the Seller and their solicitors. The Seller will then prepare replies with evidence documents in support to the satisfaction of the Buyer. This will be before the due diligence process is concluded.
Due diligence is an important process. This is because it will determine whether the Buyer wants to proceed with the acquisition based on the information disclosed. It is therefore in both the Seller and the Buyer’s interest to ensure that due diligence is undertaken thoroughly. It can be an extensive process, subject to the complexity of the transaction and should always remain subject to specific rules and agreements on confidentiality and non-disclosure.
It is normally for the Buyer’s legal representative to prepare the first draft of the acquisition agreement; which is thereafter sent to the Seller’s legal representative. This is the most important document in the process. It sets out the deal terms on a legally-binding basis and essentially governs the structure and completion of the transaction.
As a seller, you will want to ensure that you are not liable for any breaches. This includes information in respect of which you have already disclosed to the Buyer. A disclosure letter will offer you that protection.
After having sight of the draft acquisition agreement, the Seller’s legal representative will normally prepare a disclosure letter. This will inform the Buyer of any changes that have happened in the business, and whether there are any irregularities. The acquisition agreement sets out a schedule of ‘warranties’ which are legally binding representations and assurances about the business. If any of these are untrue or need to be qualified, they are corrected/qualified in the disclosure letter. Corrected or qualified details are often referred to as ‘disclosed against’. The liability of the seller will then be mitigated.
Negotiate and agree the acquisition agreement and the disclosure letter
The acquisition agreement and the disclosure letter will be sent to the Seller and Buyer respectively. Their legal representatives will then undertake negotiations for the purpose of agreeing a final version of these documents; which is acceptable to both parties.
This can also be an extensive process, subject to the complexity of the transaction; as well as the relationship between the Buyer and the Seller.
Depending on the structure of the deal (as in many cases), exchange and completion can be conducted simultaneously. Once the acquisition agreement has been agreed, each respective signed copy will be exchanged with the other party’s solicitor. This is the point of ‘no return‘. It is the point when both the seller and buyer are bound to the contract they have signed. Sometimes a deposit is paid on exchange, although this does not have to be the case.
Conditions and consents
Contracts can be subject to conditions required to be fulfilled by either Seller or Buyer. Such conditions will have to be fulfilled before completion can take place.
Each party’s legal representative will also obtain consent from the Seller and Buyer respectively that they can proceed and complete.
On completion, both the Seller and the Buyer’s legal representatives date the relevant documents. The purchase funds from the will be sent to the seller. It is at this point that the transaction is finalised, or ‘completed’.
The solicitors will then prepare a ‘completion bible’ containing all relevant documents involved in the transaction (except for the due diligence disclosure), indexed and bundled, for each party’s record keeping.
The Corporate Commercial Department here at Fisher Jones Greenwood LLP can guide and assist you with the preparation of any relevant documents. Should you require any further information or assistance please do not hesitate to get in touch – call 01206 700113 or email [email protected].