Whether we like it or not, when buying or selling businesses, the legal aspects need to be addressed in order to protect both the buyer (Purchaser) and the seller (Vendor), which will require a “contract of sale” agreement. Whilst no deal is the same, deals often follow a process where there are 5 key stages:

STAGE1:  Pre-Sale

The key here is to ensure that appropriate advisers in place; such as tax, financial and legal advisers. Before discussions for sale or purchase get underway make sure that there is a Confidentiality Agreement or Non-Disclosure Agreement (NDA) in place, as its often the first thing the Solicitors will ask for. This will help ensure that matters remain confidential during negotiations and remain so, should the deal fall through, with important documentation returned to the Vendor.

STAGE 2:  Heads of Terms (HoT)

This is an important document which will outline the detail on what is included (or excluded) in the sale, the price and payment structure, pre-conditions of sale, together with an outline of warranties and indemnities. Whilst not fully binding, it needs to be carefully drafted to ensure that the confidentiality terms of the NDA are included. It will also need to confirm any periods of exclusivity to complete the sale, which is the main legal aspect of this document. A target date for legal Completion is useful to include within the HoT to enable all parties to be focussed on the timescale from the very start. Protracted deals without a timescale lead to “deal fatigue” where one or both parties end up withdrawing from the process. 

In addition to the above, the  HoT document should include details of who is selling the shares, who is buying and the target Company. Confirmation that it’s a Share Sale (as opposed to an Asset Sale), percentage of the shares being sold; the Purchase Price, often known as the Headline Price or Enterprise Value, and how it’s to be calculated with any adjustments to be made e.g. “Cash Free/Debt Free”, working capital etc (for further details CLICK HERE); Payment Terms with amount due on Completion, deferred/instalments, any earn-outs based on future performance-based payments, use of escrow or retention accounts; general agreements on scope of Due Diligence, Warranties & Indemnities, any known issues to be flagged early and dealt with; any Restrictive Covenants on the Seller; treatment of Management & Employees; responsibility for Legal Costs & Expenses, Governing Law and Jurisdiction.

The HoT document should strike a balance – detailed enough to align expectations of the Buyer and Seller but not so detailed that it becomes a full-blown Share Purchase Agreement (SPA). A clear, concise and well-structured HoT helps ensure a smoother transaction process and reduces the likelihood of misunderstandings later on.

STAGE 3:  Due Diligence  (DD)

Vendors are usually required by Purchasers to complete what can often be a lengthy questionnaire covering all aspects of the business for sale, ranging from accounts, to litigation, to regulatory compliance and property/environmental issues. Very often, DD specialists are used to carry out investigation work, reporting back their findings to the Purchaser. It is essential that this process is policed properly as due diligence work may impact on warranties and indemnities a seller may be asked to give in due course. Also, if the business is not as described by the seller, it may result in the offer being revised or withdrawn. It’s always best practice to be transparent – sellers should not try to hide issues; better to disclose early and control the narrative. 

Due Diligence will often cover Financial Information, Legal & Corporate Documents, Commercial Information, Operational Information, Employment & HR, Tax Matters, Legal & Compliance, Assets & Liabilities, Environmental and Management & Strategy.

It’s recommended that a Virtual Data Room be set up with clearly labelled folders, allowing quick and easy access to information. A disorganised process slows the deal, raises red flags and risks the deal falling apart through “deal fatigue”.

A well-prepared seller doesn’t just react to questions – they anticipate them and present clear, organised information that builds confidence with the buyer and protects value.

STAGE 4:  The Contract of Sale – Share Purchase Agreement (SPA)

The SPA is the main legally binding contract that’s used for completing the sale of a Company’s shares and provides the full legal framework for governing the transaction, designed to protect both the buyer and seller. The type of contract will be tailored to meet the parties’ requirements and therefore, the document will be unique to each sale. This will apply whether the transaction is a share or asset sale, a management buy-in (MBI) or buy-out (MBO), a sale to family members, a joint venture or merger, or part sale.

An SPA should include all the items agreed within the HoT but in far more detail, covering the sale price, completion arrangements, warranties & tax covenants, limitations on claims and third party rights. From a practical view, it will also need to deal with the non-disclosure of confidential information known to both parties and competition issues between the parties. It may be necessary to consider provisions covering situations where there are on-going contracts or staff transferring from one employer to another.

The DD and SPA stages run in parallel in practice, as they are closely interconnected, as findings from the DD will invariably shape the legal drafting. Early drafts of the SPA are often quite generic and, as DD continues, the SPA document becomes more tailored to the business and its risks.

STAGE 5:  Warranties/Indemnities/Disclosure

Typically, a Purchaser will want wide ranging warranties, whilst a Vendor will want to ensure a warranty is qualified to avoid a claim! A practical solution is needed which meets the needs of both.

The key for a Vendor is to ensure that the warranties given are accurate. Careful consideration needs to be given as to the promises being made about the business for sale. A practical view should be taken on negotiating limitations for potential liabilities by setting a time limit for claims, agreeing a threshold on claims (e.g. an aggregate limit or agreed excess), or setting a cap on the maximum amount which can be claimed.

From the Purchaser’s viewpoint, the key is to ensure that all relevant information is disclosed at the Due Diligence stage and that information is not distilled by ineffective warranties or indemnities. The potential impact of inaccurate information being provided must be considered and a view taken. Due diligence work is therefore, a vital and essential part of the buying & selling process, forming a bridge from the initial offer to legal completion.

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