Article written by Ana-Maria Badeanu, Corporate and Commercial Solicitor
Buying or selling a business is a significant milestone – but it’s also a transaction fraught with legal, financial and operational risks. Whether you’re a seller looking to exit cleanly or a buyer aiming to acquire value without hidden liabilities, risk mitigation is essential to protect your interests and ensure a smooth transition.
Due diligence is non-negotiable
Thorough due diligence is the cornerstone of any successful transaction. Buyers should investigate all areas of a business they are looking to acquire and ensure they include any matters that may be relevant or key to the specific to the industry. These areas may vary from business to business, depending on the nature of the business and the industry in which they operate, but will generally include:
- Ownership and corporate structure
- Financial records and tax compliance
- Banking and finance arrangements
- Employment related contracts and liabilities
- Asset and intellectual property ownership
- Regulatory, compliance and licensing issues
- Data Protection compliance
- Property ownership or occupation arrangements
- Insurance coverage and any current or recent claims
- Contractual relationships with both suppliers (trade and non-trade) and clients
- Environmental and health and safety matters
- Pending litigation or disputes
Sellers, on the other hand, should prepare for scrutiny in these and other relevant areas. It is beneficial, for both a smooth due diligence process and for building confidence in the buyer, to ensure that any relevant documentation is complete, accurate and accessible.
Agree the key terms of the deal at the outset
Before diving into negotiating or drafting a full sale agreement, a well-drafted Heads of Terms sets expectations and outlines key deal points. While generally not legally binding (save for certain provisions such as exclusivity or confidentiality), this helps prevent misunderstandings and provides a roadmap for negotiations between the parties.
Warranties and indemnities
These clauses, commonly found in the contract between the parties, allocate risk between buyer and seller. Warranties are statements of fact about the state of the business’ affairs which the buyer commonly requires the sellers to give at the point of sale.
To the extent that a warranty turns out to be untrue, the buyer can claim against the sellers to recover any loss it suffers. This ability of the buyer to make a claim is often subject to a number of heavily negotiated limitations such as time limits or financial thresholds.
Indemnities provide compensation to the buyer if specific risks identified during the due diligence process materialise. These are generally subject to far fewer limitations, or may not be limited at all.
Whilst a buyer will want wide ranging warranties and indemnities to ensure they are adequately protected, sellers should aim to limit their exposure through and negotiating appropriate limitations on the buyer’s ability to bring a claim.
Structuring the deal
The structure, whether a share sale or asset sale, can have significant implications for tax, liability and continuity. Share sales transfer the entire company, including its obligations. Asset sales allow buyers to cherry-pick assets and leave behind unwanted liabilities.
It is important for both buyers and sellers to consider and take appropriate advice on a deal structure to ensure they are aware of the obligations and liabilities they will inherit, how the structure may affect the continuity of the business for both customers and staff and to be aware of the tax implications.
Post-completion protections
Restrictive covenants (e.g. non-compete clauses), transitional support agreements and escrow arrangements can help manage post-sale risks and ensure continuity. A buyer should seek to protect the investment they have made in the acquisition, whilst a seller will want to ensure they get a fair deal for any transitional period and that any restrictions on them will not unduly impact their ability to implement their future plans.
Tax planning
Both parties should seek tax advice early. Poor planning can lead to unexpected liabilities or missed reliefs such as Business Asset Disposal Relief (formerly Entrepreneurs’ Relief).
Conclusion
Business sales and purchases are complex, but with the right legal guidance and a proactive approach to risk, they can be transformative and rewarding. If you’re considering a transaction, speak to a legal advisor early to help you stay protected from start to finish.
For more information or to discuss a particular matter in further detail, please feel free to email me or contact the team on 020 8858 6971.