Posted:13-March-2023
Legal Requirements: Buying a Business, The Process
When it comes to buying a business, it can certainly seem quite daunting. Whilst here at Signs Express we support you every step of the way, we want to ensure you’re getting expert advice at all times, therefore we partnered with Franchising Specialist Law Firm EMW Law to break down each stage of the legal process associated to buying a new business.
In legal terms this process is known as a “Transaction”. There are a number of key steps that must be completed in order to protect the interests of both parties, and they can be summarised in six steps:
Step 1 - the buyer identifies a company it wants to purchase (the “Target”) and it begins exploratory talks with the seller or a seller may actively seek a buyer whether that be the management team or a third party;
Step 2 - before conversations go into too much detail, the parties will sign a non-disclosure agreement to protect the confidentiality of the Transaction;
Step 3 - the buyer begins initial due diligence to check for any obvious red flags;
Step 4 - the parties will draw up an indicative agreement. This document may also be referred to as the heads of terms or letter of intent because it sets out the terms of the Transaction that have been agreed in principle between the parties. The heads of terms will form the basis of the agreement documenting the Transaction;
Step 5 - full due diligence is conducted. This will enable the buyer to scrutinise every aspect of the Target, including, but not limited to, information about the corporate structure, any existing or historic litigation that could affect the value of the business, the financial stability of the Target, and information about its employees. The level of due diligence will depend on the type of Transaction and the buyer. If the sale is to management it may be that they know enough about the business to not need legal assistance with the due diligence.
Step 6 - contract negotiation and disclosure. The type of agreement typically entered into between the parties is a ‘share purchase agreement’ commonly known as an “SPA”. The SPA is usually drafted by the buyer’s solicitor and will include a number of statements about the Target, called warranties, that the buyer expects the seller to give. Where the seller knows that it cannot agree to a warranty, he must tell the buyer in the form of a disclosure. The warranties are important to the buyer because it will allow him to make a full and fair analysis of the Target and the Transaction.
All disclosures are collated into what is known as a ‘disclosure letter’. The seller’s solicitors will be responsible for drafting the disclosure letter as it is a key document for the seller. If a warranty is breached and the seller did not make a disclosure against it, the buyer will be entitled to bring a claim for breach of contract and seek monetary compensation. To give an example, if a warranty requires the seller to confirm that there is no active litigation being brought against the Target, and the seller knows there is an ongoing claim, the seller must disclose this to the buyer or risk a claim being made post-completion.
At this stage the buyer has the opportunity to revise his offer on the Target based on the disclosures made or pull out of the Transaction completely.
Step 7 - completion. The SPA and other documents including but not limited to the disclosure letter are signed, the purchase price is paid by the Buyer and the Transaction is now legally binding. The Buyer now owns the Target and can begin the integration phase.
Steps 1 to 4 are commonly completed by the parties before engaging a solicitor to help with the purchase. These steps are more about setting out the commercial detail and each side’s expectations.
The bulk of a solicitors work during a Transaction falls within steps 5 to 7. These steps are usually conducted concurrently in order to save time and money. The solicitors for each party will amend and negotiate the documents in the best interests of their respective client which usually results in the parties entering into reasonably balanced agreements.
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