THE ANATOMY OF A BUSINESS SALE 2
This is the second in our series of notes on selling a business.
The first part in the series set out the basic differences between a share sale and an asset sale (also known as a business sale).
This part looks at the different stages to a sale.
Our third note in the series will look at some of the documents required on a share or business sale and the post completion steps.
The sale or acquisition of a business is broadly divided into three areas. These are (1) the due diligence phase, (2) the documentation of the acquisition and (3) the post-completion steps which are required.
Pre-due diligence and due diligence
One of the first things to consider if you are proposing to sell your business is to ensure that any prospective buyers have signed a confidentiality agreement that restricts their ability to use the information provided on the business in the event that the sale does not proceed. The proposed buyer will often integrate within that document an exclusivity provision, which grants the proposed buyer a period of exclusive negotiation with regard to the purchase of the business. Whether the grant of a period of exclusivity is a concern for a seller will depend on how many prospective buyers there are in the frame.
In addition, it is not uncommon in confidentiality and exclusivity agreements to include restrictions preventing the proposed buyer from soliciting customers, suppliers or staff for a set period following the end of negotiations.
Once a suitable confidentiality agreement / exclusivity agreement has been executed by both parties, the proposed buyer (usually through its legal advisers and its accounting advisers) will commence an investigation in relation to the business it proposes to purchase. The degree of investigation will depend on its existing knowledge of the business (for example, if it already has close relations with the company it may be less extensive) and it will also vary on whether or not it is a share acquisition or an asset acquisition.
The principle difference between the two in terms of the buyer’s perspective is that if a proposed buyer acquires the entire issued share capital of the company, it will take the company with whatever assets and liabilities (known or unknown) attach to that company. In an asset sale, the proposed buyer will only acquire those assets or take on those liabilities that it agrees to take on. The level of investigation, therefore, required on an asset sale (because it is only acquiring certain specific assets or taking on certain specific liabilities) can be reduced.
The due diligence process tends to be split into three areas comprising (1) legal due diligence, (2) commercial, financial, tax and accounting due diligence and (3) other more specific areas of due diligence, such as pensions or insurance or environmental due diligence. The actual mechanism by which the due diligence process takes place ordinarily involves the relevant advisers to the proposed buyer sending the seller (and its advisers) a detailed list of questions about the business (Due Diligence Questionnaire). The seller is then required to answer those questions and to provide copies of the relevant documentation.
This process is very time-consuming and this should not be underestimated. It can have a material affect those involved in the preparation of replies to the due diligence enquiries in relation to their time in running the business. It will be important for any seller of the business to have a close team of trusted individuals who it can tell about the sale. They will be the only points of contact as a rule for the proposed buyer. This is to prevent wholesale knowledge of any proposed sale and the uncertainties that that may provide to employees and other staff of the business.
There are often voluminous amounts of documentation involved so it will be key that whoever the trusted persons are have access to a photocopying facility. As a seller, the more the seller can handle in relation to the logistical organisation of the documents and providing replies to the enquiries, the less the professional costs that will be involved to do it for the relevant seller.
It will be important that all relevant documentation is funnelled through your lawyer and not sent direct to the buyer or their advisers. Historically the due diligence documents were indexed and filed in lever arch files with relevant dividers. Nowadays the compilation is through an on line platform known as a virtual data room (or electronic data room) (EDR). Documents can be uploaded directly or through your lawyers. Access can then be granted to the buyer and its advisers to the EDR. It is important to discuss with your advisers from the start the logistics of how the documents folders in the EDR should be organised so as to avoid any duplication later on in the process. It often follows the headings in the Due Diligence Questionnaire (see above). In particular, please see later in relation to the disclosure process and how it links up with the due diligence process.
It is important when uploading documents or information to the EDR or otherwise supplying that information, to comply with any contractual or other restrictions on using such information (for example confidentiality undertakings) as well as complying with data protection legislation (for example all employee details should as a rule of thumb be anonymised).
In conjunction with the due diligence process the parties would normally negotiate the Head of Terms or Letter of Intent which is usually a non-legally binding summary of the main terms of the commercial deal and sometimes some of the key commercial parameters of the sale share/business sale agreement.
In our next bulletin we look at the stages of the acquisition process. Click here to read!
This briefing note is not intended to be a comprehensive guide and does not cover every aspect of the topic and is not intended to provide legal or other advice.
Chattertons Legal Services Limited
Dated May 2022