Buying or selling a business? Familiarise yourself with these top 10 legal points

Business Insights

Whether you are buying or selling a business, the process can be complex and nuanced. Enlisting help from professionals, such as solicitors and accountants, at the earliest opportunity will enhance both parties’ chances of a successful outcome. Here are some of the key areas that they will help you to navigate as part of the process.

1. Confidentiality:

Even the fact that preliminary discussions are underway around a potential deal can be highly sensitive for a business. It is often, therefore, advisable for the parties to sign a suitable confidentiality (or non-disclosure) agreement at a very early stage. The agreement should be designed not only to ensure that the negotiations are kept confidential, but it should also extend to any information that passes between the parties during the course of negotiations.

2. Structure of the transaction:

Be clear about what is being bought and sold: will it be shares in a company that owns the business, or will it simply be the assets which make up the business? There are fundamental differences in the legal effect and tax treatment of the two transaction types, making appropriate legal and tax advice essential from the outset.

3. Funding:

It is important for all involved to understand how a buyer intends to fund the acquisition, as this can impact on the deal structure, the extent of the due diligence and the overall transaction timetable.

4. Heads of terms:

Although not legally binding, well-drafted (and well-considered) heads of terms that have received input from both legal and tax advisors can be extremely useful for setting out the key terms of the deal early on, which can help to save both time and costs when drafting and negotiating the deal documents.

5. Due diligence:

This is often a crucial part of the process and can be the most time-consuming. Understandably, a buyer will want to scrutinise the company and/or business that it is considering buying to ensure that it is comfortable with the price that it is prepared to pay. Depending on the size and nature of the target company or business, this can include legal, tax, financial, commercial and technical due diligence. If the buyer is obtaining debt finance to fund the acquisition, their lender may also want to undertake their own due diligence. Clearly, managing this flow of information will be critical and having an online data room (usually controlled by the seller’s solicitor) can ease this process.

6. Sale and purchase agreement:

There may be several legal documents required to document the various aspects of any transaction, but the main one will be the sale and purchase agreement. They are usually drafted by the buyer’s solicitor, because it represents the terms on which they are prepared to buy the company or business, and so the majority of the document will set out the various protections that they will expect to ensure that the company or business is worth what they are prepared to pay for it. To enable a buyer’s solicitor to prepare a well-considered first draft, it is best practice to wait until the due diligence process is well underway before a seller should expect a draft to be circulated. This will enable the buyer’s solicitor to provide an early indication of any matters that may need to be addressed that have arisen out of the initial due diligence investigations.

7. Warranties and indemnities:

As mentioned above, a buyer will want to include protections in the sale and purchase agreement to protect it against circumstances where it is overpaying for the company or business because it has taken on an unknown liability or it had made an assumption about the company or business that was not true. These protections take the form of warranties and indemnities, and they often form the bulk of the sale and purchase agreement and are the subject of the majority of the negotiations. The extent of the warranties and indemnities required by the buyer will often only be known once the due diligence process is at an advanced stage.

8. Disclosure letter:

Arguably the second most important legal document will be the disclosure letter. The disclosure letter, together with the disclosure bundle (which, quite often, will comprise the same documents that were provided as part of the due diligence process), will form the seller’s main protection against the buyer bringing a claim for a breach of the warranties in the sale and purchase agreement by documenting the disclosure to the buyer of all information that could otherwise give rise to such a claim.

9. Other documents:

Depending on the deal structure there will be various other legal documents that will need to be drafted and agreed. In very simple deals there may only be one or two, but in more complex transactions there may be many, many more. The drafting, negotiation and agreement of these documents needs to be factored into any sensible transaction timetable.

10. Get professional advice:

If you’re considering buying a business or selling your business, contact our team of experienced corporate solicitors for clear, expert guidance. Willans has a highly regarded multi-disciplinary team led by its corporate and commercial department who can advise you at every stage of a transaction.

Chris Wills
Partner, head of corporate & commercial Willans LLP solicitors