Transactions – prep pays off
If you are contemplating any transaction from buying a company, restructuring and/ or demerging a company, buying assets of a company or an MBO or an outsourcing agreement we find time spent on leg work will pay off. To help you manage the process we explain some of the preliminary steps any buyer should consider and those a seller should be aware are likely to crop up. Amongst other things, we look at:
Confidentiality and exclusivity
Our confidentiality agreements enable you 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.
Heads of terms for buying a business
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. 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.
On what promises are you investing or purchasing when buying a business?
Every business has key reasons for success. Most buyers want the current shareholders to promise these key reasons won’t change. The current shareholders will doubtless endeavour to limit these terms. You should ensure you are comfortable with these limitations. Common 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.
Due diligence when buying a business
There are many types of due diligence which broadly fall into legal and financial due diligence:
Legal due diligence
The due diligence varies according to the business sector and the acquisition price, we work to scale. There is no template. The trick is to avoid irrelevancies. For instance:
Technology or IP developed by the seller
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.
- 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.
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.
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.
Financial due diligence on buying a business
Usually the accountants take care of financial aspects. Once the position has been established drafting is usually required in the documentation to square off any risks identified.