Specialists In Mergers & Acquisitions

This is a document which serves to record the key terms of the deal, which have been agreed between the parties. They serve to focus the attention of the parties but are generally not legally binding. The document should also help solicitors in drafting the agreed terms without too much need for further negotiation. The heads of terms will set out the details of what is being purchased; the price to be paid; the payment terms (i.e. whether payment will be in full on completion, or whether deferred for some agreed period); and the form of consideration (e.g. cash, or consideration shares).

Often, the heads of terms will include exclusivity and confidentiality provisions. Exclusivity provisions prevent the seller from offering to sell the business to another party whilst in negotiations with the buyer, whilst confidentiality provisions seek to protect the confidential information of both parties. Confidentiality provisions are likely to be of real concern to a seller, as substantial amounts of sensitive business information will need to be disclosed to the buyer and its advisers as part of the due diligence process. As a result, some sellers may require the heads of terms to be signed before any such information is released. In some cases, it may be that a separate confidentiality or non-disclosure agreement is entered into even before preparation of the heads of terms. Unlike the other terms of the deal, the confidentiality and exclusivity undertakings contained in heads of terms will be expressly stated as being legally binding.

If you are thinking of selling your business, you first need to establish whether you wish to sell your whole business or a specific part of it.

You should engage your accountants, tax advisors and one of our specialist business law solicitors as early as possible to discuss and plan your proposed sale from a financial, legal and tax perspective. It may be that certain pre-sale steps need to be taken in order to achieve the best sale price for your business, resolve issues that may be of concern to potential buyers or to create tax efficiency for you. Your accountants or other appropriate advisors will be able to value your business. You may then wish to instruct an agent or corporate finance advisor to market your business for sale. However, if an agent is involved you should always be mindful of fees and terms of engagement and should run them by a corporate solicitor before signing to ensure you are fully aware of the small print which will be binding.

Alternatively, you may feel comfortable in marketing your business for sale yourself. The most important thing is that you seek advice from appropriate advisors at an early stage so that they can advise on, and assist you throughout, each stage of the process.

When going through a merger or acquisition, the seller has no legal duty to disclose to the buyer any issues, defects or liabilities affecting the business. The buyer needs to conduct its own investigations, which is known as the due diligence exercise.

Due diligence can take the form of commercial, legal, accounting, financial and tax investigations (amongst other things) and may involve various different advisors such as solicitors, accountants, tax advisors and specialist advisors (for example, health and safety or environmental consultants).

The extent of due diligence will depend on the specifics of the transaction, what is being sold, the size and nature of the business and the buyer’s appetite for risk.

The aim of due diligence is to uncover any problem areas in relation to the business enabling a buyer to:

• make an informed decision as to whether it wishes to proceed to purchase the business;
• assess whether the purchase price offered is fair or whether there will be any issues or liabilities post completion that should result in a reduction to the purchase price;
• have a rounded view and understanding of the business and assets that it is acquiring and any liabilities that are being assumed;
• to know whether any post-completion actions need to be taken;
• to negotiate further protections from the seller in the sale and purchase agreement with regard to known liabilities or concerns; and
• determine whether any additional contracts or documents are required in relation to the transaction.

It is important to take advice from your accountant and/or tax advisor as well as one of our specialist business law solicitors when you are considering selling your business as they will be able to advise on the best structure for the sale. An asset sale and a share sale have different effects for a seller (and a buyer) from both a legal and tax perspective.

In a share sale the buyer will acquire the shares in the company from which the business is traded. This means that the company retains ownership of its business, assets and liabilities and continues to operate and trade in its usual way without interruption, but with new shareholder owners.

From a legal perspective, sellers generally prefer share sales as all liabilities of the business remain with the company and the seller will achieve a clean break without having to wind up the limited company. In an asset sale a buyer acquires just the trading business (the goodwill) and associated assets that the seller and the buyer agree are to be sold.

In an asset sale, the buyer will cherry-pick which assets it wishes to acquire and will only agree that limited liabilities (if any at all) will pass to it. Generally speaking, most liabilities arising before the completion of the transaction will remain with the seller.

To this end, from a legal and tax perspective, buyers usually prefer asset purchases. Asset sales are appropriate for sellers who wish to sell only a part of their business or certain assets but wish to retain the rest. Whether a transaction proceeds as a share sale or an asset sale will ultimately be a commercial decision for the parties to the transaction but may depend on the following:

• the tax consequences for the seller and the buyer;
• the bargaining power of the parties – who wants the sale or purchase more;
• what is the economic climate at the time of the sale and purchase;
• what are the terms that are being offered;
• whether there would be any difficulties in transferring the business or any of the assets such as obtaining consent from regulatory bodies, third parties in respect of key contracts, landlords in relation to any property out of which the business is traded; and
• the existence of any extensive liabilities of a company.

If you are considering selling your business, it is important to plan ahead and take advice from the right professionals so that you understand the legal and tax implications of the sale structures which will enable you to find a structure best suited to you.