The seller of a UK company has two main concerns. Firstly that they obtain the best possible price for their business and secondly, that the commercial integrity of the target is not compromised as a result of an aborted sale. These concerns are addressed in a number of ways, discussed below.
It is important to ascertain the seriousness of any potential buyers, to minimise the risk created by releasing confidential information. The parties will start off by signing non-binding ‘heads of terms’ (otherwise referred to as a ‘term sheet’ or ‘memorandum of understanding’) to record the basic terms and the form of the transaction. However, one provision the seller will want to make binding is any confidentiality provision, which in turn may be accompanied by a separate confidentiality agreement. This should be the first document to be signed, and it is designed to ensure that sensitive business information about the target is kept confidential and is not used for any other purpose other than by the prospective buyer for the purpose of evaluating the business. Any leak of such information can have a detrimental effect on the employees, customers, suppliers and goodwill.
The buyer, who is subject to the caveat emptor (‘buyer beware’) rule, will want to carry out thorough due diligence to minimise any legal, financial and commercial risk of acquiring the target and to get a better understanding of what the business may be worth and what points they will need to negotiate. The seller must undertake a legal audit in a number of areas to prepare for these due diligence enquiries, which will take the form of a questionnaire. Some of the issues the seller must audit and investigate to identify any potential problems and prepare due diligence responses include property and intellectual property ownership, employment contracts, commercial contracts, claims against the company and general company record keeping and compliance with regulations.
The seller may want to provide the buyer with information prior to the buyer submitting their questionnaire so as to speed up the transaction and focus the buyer’s investigation.
A big financial concern for the seller is the tax liability upon selling the company as a seller will want to benefit from Entrepreneurs Relief which reduces their capital gains tax to an effective rate of 10% (from 28%) on qualifying gains made up to £10 million.
Once the share purchase agreement has been drawn up by the buyer and the parties are at an advanced stage of negotiating it, the seller must go through the process of disclosure to avoid any liability for a breach of any of the warranties included in the agreement. The seller discloses by means of a general disclosure letter, which includes specific disclosures relating to particular issues with each individual warranty. This process qualifies the warranties so that the buyer is provided with all relevant information in the disclosure letter and the seller will therefore not be liable for any breach of warranty in the share purchase agreement if they have disclosed adequate information.
The seller’s solicitors will want to ensure there are certain limitation of liability and vendor protection provisions in the share purchase agreement. Under normal limitation rules the seller is liable for a claim of any size, without qualification or limitation, for a period of up to 6 years (12 years if the document is signed as a deed). The seller will want this exposure limited with clauses such as a de maximus/de minimis clause to cap the overall liability and prevent trivial claims; and time restriction clauses. The seller will only want to be liable for 2/3 years for non-tax related claims (time enough to carry out two audits), and 7 years from completion for tax claims (to allow for HMRC investigations). The seller will also want to reduce the scope of the warranties so as to only include things within their knowledge
At the completion stage of the transaction, the seller needs to prepare their bank, as new bank mandates will need to be put in place and confirmations given as to the balances in the bank accounts on completion. To complete, a board meeting will need to be convened to ensure all documentation is signed. There is sometimes a gap between exchange and completion (e.g. due to the need for shareholder approval) so the seller will want to ensure they aren’t prevented from carrying on their business as normal in this period.