Selling or acquiring a business can be a time-consuming and complicated task. It is essential to know precisely what is on the table, what it is worth and how to protect yourself against unexpected liabilities. However, by taking caution, involving solicitors early on and familiarising yourself with the process, it doesn’t have to seem so daunting.
What is being sold?
At the outset, the most critical issue to address is what exactly is being sold. There are two options when it comes to selling a business – selling the assets or the shares. The legal process, however, slightly differs depending on what you are buying. In an asset sale, it is only the asset of the business that is being transferred to a new owner and not the ownership of the actual business. In practice, that means that the buyer does not acquire the company itself but gets to choose what he/she needs from the company, such as equipment, accounts receivable and property, without being forced to take on all of the business’ liabilities, avoiding any duplications.
Simply put, the buyer acquires the desired value within and leaves the seller intact as a separate legal entity. On the other hand, when selling the shares, the buyer steps into the seller’s shoes as a shareholder and inherits the seller’s company. There is no transfer of asset ownership and the company’s properties, contract and employees remain. Another perk of buying the shares rather than the asset is that it usually can be completed without third party involvement, hence making a shares sale lot more discreet than an asset sale.
What is an Asset?
Assets are generally anything of value within a business that can be converted into capital. They may be tangible assets, such as property, machinery and stock, or intangible, such as goodwill. The value of the goodwill is represented through avenues such as the business’ customer relations, employee relationship, intellectual property and brand name – making it much harder to value in a sale. A company may also have shared assets if only certain parts of the business is sold. It is therefore crucial that the buyer ascertains the impact this would have on the remaining business and the seller.
Heads of Terms
It is good practice to draft a Heads of Terms or Letter of Intent before proceeding with the sale. The “Heads” is a non-binding (as long as it is clearly stated on its face) skeletal outline that sets out the principal terms of the deal. The benefit of spending some time on the Heads is that it helps to focus the parties’ negotiations, reduces the scope for disagreement further along and serves as a useful map for both accountants and solicitors.
In addition to the Heads of Terms, it is important to sign a confidentiality agreement (NDA). This ensures that all information is kept confidential from third parties, employees and customers. It might also be useful to negotiate an exclusivity or lock out agreement. An exclusivity agreement is especially beneficial to the buyer since the seller would not be allowed to offer the business for sale to anyone else during the prescribed timeframe and hence would not need to compete with other potential bidders.
Importance of Due Diligence
Perhaps the most crucial part of the asset purchase process is the due diligence. Do not try to attempt to do this on your own – many issues needs to be considered from a legal viewpoint, so make sure to involve solicitors, as well as accountants and other relevant professionals. It is during this process the buyer and his professional team investigate what is being acquired to make sure he/she gets what is presented to him/her. It is important to stay organised, so the buyer will usually issue a questionnaire, which asks for particular documents and clarifies any points of ambiguity. The key to fruitful due diligence is a proper analysis of the responses to the questionnaire since these answers will form the basis of the warranties in the asset purchase agreement. However, bear in mind that the due diligence should not commence before an NDA agreement is in place, and not before the Heads of Agreement has been signed. It is also vital to establish a timeline for the investigations and determine when the responses can be expected.
The major areas that need to be investigated are:
- The supplier and customer base.
- Real estate: survey the value of the property/terms of a lease, investigate the planning permission and potential environmental issues.
- Intellectual Property: consider the validity and value of copyrights, patents, trademarks and design rights.
- Finance agreements: for example, whether there are hire purchase and lease agreements for machinery and equipment.
- Employees of the business: it is crucial to identify the employees and their terms of employment. When the assets form an identifiable company, the employees tend to pass automatically with all their accrued employment rights, regulated by the Transfer of Undertakings (Protection of Employment) Regulations Act (TUPE). Keep in mind that employees may be made redundant after a sale, something that could affect the purchase price, and employment contracts might need to be re-written.
- Pension schemes: failure to consider pension schemes can gravely affect the acquisition's net value.
Asset Purchase Agreement (APA)
The Asset Purchase Agreement, often referred to as the APA, is similar to other contracts that complete an M&A transaction. It sets out the terms and conditions relating to the asset sale in question and will involve goodwill, employees, stock and VAT (but if the business is purchased as a “going concern”, then VAT can be ignored as long as both parties are VAT registered).
Most importantly, the agreement sets out what is being acquired, as well as what is excluded, for example whether creditors or debtors are left behind. The APA must also lay out the representations and warranties, covenants, closing conditions, indemnification and liabilities. Warranties, in particular, have two vital purposes, one is to disclose any information that the buyer ought to know, and second to protect the buyer if the company is not as it was represented. It is important that the buyer makes sure the seller does not make over-general disclosures – disclosures need be specified. Indemnification provisions allow the buyer to be compensated by the seller (and vice versa) for any misrepresentations or breaches in the agreement. The buyer must also establish which liabilities are assumed. The APA typically aims to limit liability, but if there are liabilities the buyer does not include in the purchase, both parties are responsible for making sure the purchase is less than the real value of the assets, and that the company stay capitalised to pay liabilities and debts. If not, this could make the transaction fraudulent.
If you need a lawyer for your asset purchase, reach out to Lexoo for quotes! Our experienced lawyers will make sure to guide you throughout the whole process. For further information and to submit your enquiry, click here.