How to buy a business - key issues explained
Buying a business successfully requires more than legal advice. The buyer will need to consider the value of the company or business, taxation implications, finance as well as legal considerations. Our experience and commercial acumen will help you manage a smooth acquisition.
Overview
The following checklist sets out the fundamentals you will need to work through to purchase a company or a business and secure the best price.
Before to commence the process of buying shares in a company or a business it is wise to stand back and consider the essential commercial drivers.
- Be clear on reasons for purchase (expansion, diversification, synergies).
- Consider market sector of business, competition, availability of suppliers.
- Consider stage of economic cycle.
- Be discreet with approaches to potential sellers (consider using independent agent).
- Agree confidentiality agreement with seller.
back to topHeads of Terms of Agreement
The heads of terms is an important commercial document in the process involved in buying a company, business or shares as they set out the basic framework. Ideally, the heads of terms of agreement are agreed before commencing due diligence.
- Agree heads of terms with seller and consider responsibility for costs and appropriate exclusivity period during which the seller is prohibited from entering into negotiations with any other potential buyer.
- Agreed price set out in heads of terms should be subject to results of due diligence and completion of sale and purchase agreement.
- Establish time frame for completion of the sale.
Before drafting the heads of terms it is wise to have considered whether a management buy out MBO vechicle is appropriate or whether objectives are best achieved by a joint venture.
Due diligence is the process by which you get to know the company or business you are planning to buy and work out the price of the shares or business you are acquiring.
- Due diligence can be simplified by the production of legal, financial and commercial due diligence questionnaires.
- Maintain copy of all information and documents provided by seller and advisers during due diligence.
The documents it is likely you will need to review before buying a company or a business include:
- Ensure seller has title and ownership of assets (including intellectual property, information management systems, plant and equipment)
- Review seller's legal status and regulatory framework, ensure all appropriate licences and insurances in place
- Ensure compliance with all statutory and regulatory issues
- Review employees' contracts of employment and assess potential liabilities for redundancy
- Review customer and supplier contracts and make sure they can be assigned to the buyer or purchaser of the company, business or shares.
- Where property involved, conduct property searches and physical inspection.
- Conduct solvency searches against seller and seller's business. Assess potential liabilities generally (including customer/supplier disputes and employee disputes). Find out if there are any unresolved disputes.
- Verify financial and management accounts (previous, current and projections to budget).
- Review all books of account and sales ledgers.
- Review tax assessments, records and payments.
- Assess the seller's position in market and strength of competition
- Assess commercial risk as to seller's reliance on key customers or suppliers.
- Conduct physical inspection of property, plant and equipment of the seller if appropriate.
You will need advice from our specialist taxation team on how to structure the purchase or acquisition efficiently. Advice is also required on how to maximize the value of the deal.
- Seek tax advice on preferred and most tax efficient structure for purchase as between an acquisition of the corporate entity or purchase from the corporate entity of its business and assets (where buyer can cherry-pick the assets).
- Where acquisition is of business and assets, consider which assets and liabilities will be acquired and any ongoing support required from seller.
The terms of any funding arrangement will usually require careful negotiation. Bank finance and investment finance is usually involved and this needs to be factored into the acquisition process.
- Consider whether buyer will require external finance to fund acquisition.
- Consider source of finance (including banks, friends, family, venture capital, business angels, investment exchange).
Bank Finance
- Term loan, overdraft or mix (note requirement to repay, unlike some equity finance).
- Consider terms of finance (including performance covenants, trading requirements and internal corporate restrictions) and affordability of repayments schedule and interest payments.
- Buyer may be required to give security for finance (eg, security over assets of buyer and seller, and personal guarantee)/
Investment Finance
- Investment for share capital in buyer (note no requirement to repay if non-redeemable share capital).
- Consider convertible loan capital.
- Consider loss of control in corporate entity and shareholder arrangements (through articles of association and shareholders agreement).
back to topConsents and Regulatory Issues
- Consider whether the terms of any shareholders agreement or other arrangement between seller and any other owners of the business, or any regulatory authorities, require prior consent of shareholders (or any other person).
- Where leases involved, landlord consent may be required.
- Where seller subject to bank borrowings, bank consent required.
back to topTerms of Sale
The terms of sale are usually not finalised until the due diligence is complete and finance is in place. There are many ways to pay for a company or business and spread the risk and payment terms and this is where our experience in handling many acquisitions in the past becomes important.
Price
- Consider results of due diligence and prevailing economic conditions.
- Consider whether price will be paid in cash, shares or debt.
- Consider whether price is payable on completion of the sale or by future instalments.
- Where price is deferred, seller may require security for, and interest on, future payments.
- Consider whether price is dependent on valuation of business at completion or future profits or turnover of the business.
- Where price dependent on future trading, seller may require level of continued influence on business and management going forward.
Risk
- Depending upon results of due diligence and its affect on price, buyer should insist upon warranties as to state of affairs of the seller and business, and indemnities in relation to known liabilities of the business.
- Consider retaining part of purchase price of the company, shares or business for warranty period to ensure successful claims for breach of warranty or indemnity can be met (in part, at least).
- Seller may seek to reduce or limit potential liability for breach of warranty and indemnity by disclosure, limiting time period within which claims may be made and limiting monetary value of claims.
back to topOngoing Responsibilities and Restrictions
A condition of many acquisitions of companies and businesses requires the seller to remain involved to transition the acquisition. You need to think about whether the seller is likely to be involved in a competing business which could destroy the value of the company you have just bought. Sellers can be prevented from competing and restrictive covenants are common but without express commercial contract provision the buyer is vulnerable.
- Consider terms upon which buyer may require seller to continue to be involved in the company or business (both personal terms and extent of decision making and influence over business).
- Consider nature and extent of any restrictive covenants to which seller should be subject following completion, to protect goodwill and custom of acquired business or company which underlies the share valuation.
back to topCompletion
Completion is when the company or business actually changes hands. The buyer or purchaser will be concerned that legal title to shares and assets is properly passed over.
- With acquisition of business and assets, buyer requires assignment of commercial contracts, leases, licences.
- With acquisition of shares, buyer requires signed stock transfer forms from seller(s).
- Delivery to buyer of all certificates of title to assets acquired.
- Ensure assets have benefit of continuing insurance following transfer.
- Stamp duty may need to be paid.
The matters outlined above are not exhaustive, but do highlight the more significant issues for a buyer when considering an acquisition of a business (by assets or shares). Gannons has the expertise and capability to give commercial and practical legal advice and guide a buyer through the acquisition process.
This paper is designed to provide a summary of the issues addressed. Therefore, it is not intended as a detailed commentary on the relevant law and any comments made should not be acted upon without first taking specific legal advice.