Company Sale and Purchase an over view
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There are many reasons why a decision may be made to acquire or dispose of a limited company. Motives for buying a company may include an attempt to increase market share, acquire new technology or designs, diversification, to enter new markets rapidly or to gain control of valuable assets or resources. Motives for the disposal of a business include personal reasons such as ill health, divorce, death, to raise finance. Once it has been determined to acquire or dispose of a business a decision needs to be made as to how to “target” potential vendors or purchasers. Options include appointing business transfer agents, advertising or using existing trade contacts.
PREPARING THE BUSINESS FOR SALE:
Care is necessary before a business is formally marketed:-
| 1. |
If the seller is contemplating a sale of only part of the business then it may be necessary to take steps to separate the business out – premises, employees, services (for example accounting and administrative functions) may need to be “hived” into separate companies. There may need to be decisions made as to what records are to be disclosed to prospective purchasers. |
| 2. |
Advice may be necessary as to how a sale might be achieved – whether it be by a sale of assets or shares in the company. |
| 3. |
Great care is necessary in terms of the information which is to be made available to prospective purchasers. Considerable commercial damage might accrue to too much information being given to prospective purchasers (who may well be competitors) in an uncontrolled fashion. Prospective purchasers may need to be required to sign confidentiality agreements. |
| 4. |
Legal liability may be incurred for representations made by a seller which later turn out to be incorrect. |
VALUATION OF THE BUSINESS:
A tension inevitably exists between prospective sellers and purchasers of companies as to valuation. There are a number of different approaches which may be adopted:-
| 1. |
Price earnings ratio. This is a calculation involving an analysis of historical and anticipated earnings per share in the company. |
| 2. |
Net assets plus. This involves a valuation of the company’s net assets and the attribution of an additional value (more of an art than a science) as to what added value the purchaser believes that he can gain from the business (for example by means of cost savings, cross selling opportunities etc.) |
In considering a valuation it is naturally important to take accountancy advice but in pricing businesses for sale or purchase there is usually a subjective element which will include issues such as the seller’s motives for disposal and the benefits which may be available to the purchaser and cost savings, or perceived benefits to the purchaser of diversification and acquisition of a competitor.
Thought will also need to be given as to how the price for the company should be structured. Options include:-
| 1. |
Payment of a fixed cash price on completion. This approach has the advantages of clarity, simplicity and minimises the risk of post completion disputes between the parties. |
| 2. |
Formula cash price. The parties identify the price by reference to the past and/or future performance of the company. This is more complex, may lead to a greater possibility of disputes and may be more attractive to a purchaser who knows that the price to be paid will depend upon the continuing performance of the company. |
| 3. |
Deferred consideration. This is likely to be limited in application to those cases where key personnel from the company to be sold will continue to be responsible for its management post completion and the purchaser wishes to motivate these individuals. In these circumstances the seller is likely to require security that payment will be made which may take the form of Legal Charges over land or Guarantees. |
SALE OF SHARES OR ASSETS:
It is necessary to consider whether the business sale should take place by means of a sale or shares in the company or a sale of the company’s individual assets. It is likely that a vendor may prefer a sale by shares:-
| 1. |
It will involve a single charge to tax – Capital Gains Tax and in that regard there are a number of opportunities for mitigation which include shareholder’s annual allowances,and compensation for loss of office (such as director’s office) which is exempt from tax up to £30,000.00, the consideration of a pre sale dividend (converting capital to income) and investment in pension funds amongst other opportunities. |
| 2. |
The vendor will then have no continuing liability for the debts of the business – subject to compliance with warranties (contractually binding representations and promises) contained in the sale agreement. |
| 3. |
The transaction is straight forward – there needs only to be a shared transfer agreement and separate agreements providing for the transfer of each separate category of assets and the transaction may therefore proceed more quickly. |
DUE DILIGENCE:
The buyer’s preference is likely to be to acquire assets only – to avoid potential liabilities which may be attached to the company (for example creditors, possible product claims, etc.) A company sale proceeds on the basis of “buyer beware” and where the vendor insists on a sale of shares it is likely there will be detailed “due diligence” to require the seller to prove for example:-
| 1. |
That he has good title to the shares in the company. |
| 2. |
That he has good title to the company’s assets. |
| 3. |
That there are no restrictions on sale – for example directors resolutions preventing a sale or insolvency problems. |
| 4. |
That the landlord of any premises has given appropriate consents. |
| 5. |
That any lender’s security over assets are to be released. |
| 6. |
That there will be an effective transfer of customer and supplier arrangements. |
| 7. |
Is the company involved in litigation – what risk does that pose? |
| 8. |
There will need to be consideration of transfers of amongst other things intellectual property rights, occupational pensions and employees. There will need to be full disclosure as to all rights and obligations concerning these areas. |
| 9. |
There will need to be a review of the company’s statutory books and it may be advisable to undertake credit searches. |
FUNDING OF A PURCHASE:
The purchaser will need to consider how the acquisition is to be funded. A vendor is likely to require cash or may possibly agree to receive payment in whole or in part by shares in the purchase of the company – an approach which may defer liability for tax.
In terms of raising finance a borrower’s options may include:-
| 1. |
Payment in cash – borrowings may attract tax relief and further any valuable assets of the company to be purchased may be utilised as security. |
| 2. |
The purchasing company may determine to issue further shares and seek to raise capital by this means. |
CONTRACTUAL DOCUMENTATION:
Once the terms have been agreed the contract documentation will need to be drawn.
SHARE SALE:
In the event that the sale is to proceed by means of a share purchase the document is likely to contain extensive warranties by the seller which may include:-
| 1. |
Promises as to the accuracy of information given to the buyer which induced him to enter into the sale. |
| 2. |
Confirmation that the company’s accounts are an accurate record of the company’s financial position. |
| 3. |
A recital setting out any significant events since the date of the last accounts. |
| 4. |
A summary confirming that the company has title to its various assets, the position in relation to any product service liability, and confirming the accuracy of all key data upon which the transaction is dependent. |
| 5. |
The agreement is likely to contain restrictions upon the vendor in relation to various issues such as competition, confidentiality and so on. |
SHARE OF ASSETS:
In the event that transaction proceeds by means of a transfer of assets there will be separate agreements for example relating to the assignment of Leases or transfers of freehold land, assignments of equipment and machinery, business debtors and creditors, goodwill, hire purchase and licensing agreements and the burden of product liability claims, employment contracts and so on will also all need to be transferred. Particular care is needed in relation to the transfer of employment contracts where there may be obligations of consultation. It is likely that all employment contracts will transfer under the Transfer of Undertakings regulations and care will be needed if it is wished to impose any redundancies or changes to employee’s terms and conditions of employment.
All that is set out above can be no more than a brief over view. The effective handling of any company acquisition or disposal involves teamwork and working relationships between professional advisers particularly business transfer agents, lawyers, accountants and sometimes surveyors and pensions advisers.
Lawson Lewis Blakers are able to provide specialist advice in relation to the purchase and sale of businesses including:-
- Confidentiality Agreements
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- Review of key documents such as Leases, Employment Contracts, etc before a business is marketed
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- Share and assets sales/purchases including associated issues such as property and employment law
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We are able to offer specialist advice.
Call 01323 720142 now for a consultation with a specialist Solicitor or a Lawyer at Lawson Lewis Blakers.
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