Buying a company
Whether you are a first time buyer or have previously bought numerous companies, there is always a lot to think about when buying a company. Below we set out ten key considerations from a legal perspective, which may assist with your purchase.
1. Exclusivity and Confidentiality
Carrying out due diligence can take a considerable amount of time and money. There is no legal binding obligation on the seller to sell until contracts have been entered into, so as a buyer you should be considering protection against the seller entertaining any offers or interests from other buyers while you carry out due diligence.
By entering into an exclusivity agreement the seller is contractually bound not to negotiate with or solicit offers from other parties and to cease any ongoing negotiations for a specified period. As a buyer you will want to ensure that news of any potential deal does not leak too early as this may have negative consequences such as causing unwanted speculation and customers or staff members leaving.
2. Target’s legal requirements
The saying “buyer beware” applies equally here as it does to other areas of the law. As part of due diligence it is very important that checks are carried out on the company which is being bought (commonly known as the Target) to ensure that the Target has been compliant with all laws. The consequences for a buyer can be costly if it has purchased the Target which is subject to fines, penalties or even worse if the Target is compelled to stop trading. Extra caution must be exercised when it comes to consents and licences (e.g. music, TV, alcohol). The buyer should always make sure that not only does the Target have the correct required licences and consents but also that the licences and consents are not restricted in any way which would affect the business of the Target. Any areas of concern should be addressed and resolved before contracts are concluded.
3. Your legal requirements
There are a number of things you will need to consider which will include:
• Whether your proposed purchase might affect any competition laws. Competition laws prevent abuse of market power; therefore mergers which have a certain market share (which can be defined very narrowly) will need to be notified to the Competition Markets Authority. The consequences of a failure to notify can be severe so buyers should carefully consider whether a notification is necessary.
• Whether you need a special purpose vehicle to make the purchase and what other tax planning might need to be done in advance.
• Paying stamp duty on the shares purchased. The amount payable will be the equivalent of 0.5% of the total consideration and although this may not seem a significant amount, the buyer should ensure that it has factored in the stamp duty and ensure that it is able to pay it within the 30 day time frame.
If you are relying on third party funding to assist with the purchase, then you will need to factor in any additional requirements of the funder and the additional time this may take. You will need to carefully consider the amount to borrow as it will not just be the purchase price that you will be paying, because you will need factor in costs such as stamp duty (referred to above), working capital and the fees of any professional advisers involved.
A warranty is essentially a statement that a fact or circumstance is true that is given by the seller to the buyer in the share purchase agreement and therefore is contractually binding e.g. no one is suing the Target. The buyer will want lots of warranties, which are wide in nature and the seller will want minimal warranties, which are narrow in nature. Warranties can relates to various different areas from accounting and finance to property and environmental. If a warranty is found to be untrue and the seller has failed to disclose against the warranty (this will be covered below), then the buyer may have a claim for breach of warranty. However a breach of warranty route would not be desirable for either party, therefore the seller will want to make disclosures as protection and the buyer will want an alternative remedy, such as an indemnity (covered below) or retention (also covered below).
The disclosure process involves the seller providing information, in a separate document called the disclosure letter, in relation to any warranty which is untrue or inaccurate. Disclosure is primarily for the benefit of the seller, because if a seller discloses against a warranty the buyer can be prevented from making a breach of warranty claim. Given that the buyer will have had the opportunity to carry out due diligence, the seller’s disclosures should not be a surprise. The buyer can use the disclosure process to get more information from the seller and if a particular issue is of concern to the buyer, the buyer can request the seller to fix the issue or seek rectification, an indemnity or retention (see below) or possibly even a price discount.
If a particular issue cannot be rectified for any reason an indemnity can offer a solution. An indemnity is a promise from the seller to reimburse the buyer on a pound for pound basis. An indemnity will usually relate to a specific liability for example non-payment of an invoice from a client.
Retentions are useful where a deal involves an on-going issue or a known future issue, for example if litigation is ongoing. A specified amount of purchase funds can kept in a separate “pot” and the parties can agree a procedure for the release of the funds if no loss is suffered by the buyer.
Price and payments are usually the top priority for both the seller and the buyer. The seller will want to ensure that it receives as much money as possible and as soon as possible and the buyer will want to ensure that it pays as little as possible. Ultimately both will want to feel that they have received the best deal. An earn-out is a mechanism used which allows the buyer to link part of the purchase price to post completion performance of the Target.
10. Post completion obligations
It is very likely that the seller will have formed key relations and have the knowledge and experience required to run the business, therefore it could be damaging for the buyer if the seller sets up a similar business or company. For this reason, the buyer will want to ensure that the seller does not compete or poach customers, staff, suppliers and key contacts. Imposing restrictions requires careful thought as restrictions found to be too wide can be unenforceable, so typically restrictions will be limited to a specific time-frame and geographical area.
As mentioned above, there is always a lot to think about when purchasing a company. Keeping the above considerations in mind, so that they can be addressed (whether in the purchase contract or otherwise) and being organised will help a deal to run smoothly.
If you are considering buying or selling a company and would like some advice from one of our experts, please get in touch with one of our team.
The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.