The 'why' and 'how'…
There are many reasons why shareholders choose to 'sell up'. For a corporate group, a business may no longer be core to its strategy. For individual shareholders, the reason may be retirement or a desire to realise a capital return from their years of hard work. For private equity, the route to exit will have been at the heart of the fund's initial decision to invest – it will, after all, only realise its investment on a successful exit.
As with acquisitions, disposals come in many shapes and sizes. Passing on ownership to another corporate (a 'trade sale'), to the next generation of the family, to management (whether or not backed by private equity) or by one private equity house to another such provider (a 'secondary buy-out') – are all common routes to exit.
Shareholders may exit on 'day 1' – this is generally the case in a trade sale. However, partial exits – where the owner retains a stake in the business or where the price is deferred over a period of time – are increasingly common in the current climate. This is particularly the case where there is a lack of bank finance available to the buyer and where the business isn't appropriate for a trade sale or private equity investment.
We would like to sell our business – how can we make sure that everything is in order in case the opportunity does arise?
Selling your business involves more than just a financial transaction. The buyer will want to be confident that your business is sound before proceeding, and this is usually based on documents that carefully record how you have been running the business.
We can undertake a corporate audit of your company and make sure that everything is in order, well before the buyer undertakes any due diligence. Spending a bit of time 'putting your house in order' and tidying up loose ends at the outset means that you will keep control of the ultimate sale process, avoid unnecessary conflict and reduce the risk of claims arising post-completion.
But it is not too late even if you have already started the sales process. We can work quickly to help you put things in order. However, don’t delay – the earlier that we can get started the better.
What role does the lawyer play when advising a seller on an M&A deal?
In the early stages of a transaction, we will typically advise on deal structure and the negotiation of heads of terms, confidentiality agreements and exclusivity arrangements.
However, the lion's share of our time will be spent negotiating the principal transaction documents, and in particular the sale and purchase agreement, on behalf of the seller. This agreement does a number of things; however, its principal purpose is to allocate risk between the parties.
For example, a buyer will normally calculate the purchase price on the assumption that the target company or business is "clean". Whether the disposal is one of assets or shares, the buyer is likely to seek extensive protections as to the assets and liabilities of the company/business through the sale agreement. This is because the general law provides very little protection to a buyer. Accordingly the buyer's main form of redress has to be a contractual one.
Our role is to ensure that the seller's liability is limited where at all possible, that the protections sought by the buyer are appropriate to the size and nature of the deal and that where a warranty is not in fact true, appropriate disclosures are made and other contractual limitations included so as to limit the seller's future liability.
What is 'disclosure'?
In the context of an M&A transaction, this is the process by which a seller makes various disclosures (both general and specific) against the warranties set out in the sale agreement. The disclosure exercise is crucial to a seller – if a seller doesn't disclose a relevant matter (for example, a product liability claim, or the termination of a key contract) then he/it risks being sued by the buyer for breach of warranty.
A key part of our role, when acting for a seller, is to manage the disclosure exercise and help the seller bring together the necessary documentation and information to ensure that the disclosures are effective. In order to make this process as smooth as possible, we offer an electronic data room facility so that the documentation can be scanned and placed on the data room and viewed by the buyer remotely.
Alongside this, we will negotiate the scope of the warranty schedule itself (this often runs to at least half of the sale agreement) and also the contractual limitations of liability.