Transactions – what to plan for

Last Updated: July 22nd, 2022

If you are contemplating any transaction from buying a company, restructuring and/ or demerging a company, asset sales or an MBO experience tells us time spent on planning for the transaction will pay off. To help you manage the transaction process we explain what is going to be important.

Why use a confidentiality and exclusivity agreement to kick off

Our confidentiality and exclusivity agreements enable buyers to manage a variety of concerns, e.g. that the seller:

  • Has no obligation to keep anything confidential unless there is a specific agreement.
  • Could speak to other purchasers about your interests or plans for the business. This might be price sensitive information, market know-how, or trade secrets that you wish to bring to the target business.
  • Could waste your time and money. An agreement can limit the risk by specifying a period during which the seller agrees to only discuss the sale or investment with you, which encourages the seller to commit to a deal.
  • Sellers are keen to keep details of the transaction out of the public domain and know they will have to sign a confidentiality and exclusivity agreement.

When to draft the heads of terms for the transaction

The heads of terms set out the basics of the deal. You’ll reduce your total costs, if you take time and care over the heads of terms agreement because it cuts down on the drafting. Heads of terms should be prepared at the beginning of the transaction.  Heads of terms are very good at flushing out problems.

The heads of terms include:

  • The parties: to the investment or purchase.
  • The agreed price: which should be subject to due diligence and completion of the share purchase agreement – this is where we add value with our share valuation expertise.

If the price can be adjusted for developments taking place during the process of buying a business then the mechanism for adjustment should be dealt with.

  • The time frame: for completion of the acquisition.
  • Targets and earn-out terms:  which often include requirements that key players remain employed after the acquisition for a defined period, for example a finance director. Deferred consideration is linked to post acquisition performance. This helps protect your investment in the target company.
  • Details of shares: if you will gain new shareholders, then set out the basic requirements for holding shares.  Rights can be covered in the articles or shareholders agreement. For example, deal with the share valuation if a shareholder leaves the business. Distinguishing between good and bad leavers is always advised.

Financing requirements: which might set-out for example:

  • If completion depends on the purchaser’s bank approval;
  • The terms on which other shareholders inject share capital to finance the acquisition; or
  • If the seller has to pay down existing bank borrowing and sell debt free.

Why are disclosure letters important

Buyers will want the selling shareholders to promise certain key features – these are known as warranties. The sellers will seek to limit the extent of the warranties under the transaction.  One of our roles is to let you know what is reasonable based on the particular transaction.  You should ensure you are comfortable with these limitations. Common warranty limitations are:

  • Time periods for claims;
  • Cap on the value of any claim;
  • Disclosures already made: meaning the buyer or investor already knows the risks and buys the business with these risks.

All transactional documents are important but one which is particularly important for a seller is the disclosure letter.  The basic rule behind a disclosure letter is that if the seller has told the buyer about “problems” or “issues” the buyer will not be able to claim against the seller under the warranties.  There can be price adjustments once the disclosure letter has been prepared.

How to manage due diligence

There are many types of due diligence undertaken depending upon the nature of the transaction. The due diligence varies according to the business sector and the acquisition price, we work to scale. 

We can set up and run a data room for you and recommend suppliers of virtual data rooms. Data rooms hold the due diligence documents on an electronic base to streamline the process.

Typical due diligence focus areas:

There is no template. The trick is to avoid irrelevancies.  For example:

If dealing with a technology transaction

We would check if the seller:

  • Has IP rights;
  • Whether these IP rights are registered, and if they are not, whether they should be; and
  • Could face third party claims.
If dealing with a professional services business

With a professional services business we would focus on employment contracts and policies.

  • Past claims often indicate how the workforce was historically managed and what claims are potentially latent.
  • If the business is regulated there should be a focus on what consents are required, e.g. FCA regulation for a business involved in the provision of financial services, or health and safety records for businesses in hospitality.
If the acquisition is all about the product

Usually, a business combines many elements e.g. a product based company probably has great design engineers. There will often be intellectual property rights in the product, for example a patent, and intellectual property rights in the designs, such as copyright. Often licences form a core of the business and need checking to avoid infringement claims.

All acquisitions 

Usually the accountants take care of financial aspects. Buyers can prepare for the disclosure that will be required by making sure records are in good order and the contents identifiable.  We usually send out checklists well in advance so that the process can get started. Disclosure will limit the risk of claims against the sellers but often results in adjustments to the purchase price as a result.

The working capital requirements are important as is cash at bank as that goes to the heart of the transaction.

Yao Trinh

Manages to explain difficult concepts in easy to understand language. In tune with her clients.

Let us take it from here

Call us on 020 7438 1060 or complete the form and one of our team will be in touch.