‘Completion accounts’ and ‘a locked box mechanism’ are two tools in share transactions that can be used to determine the purchase price. Both can be used but carry their own risks and advantages.

Locked Box Mechanism

In a transaction using the locked box mechanism, the parties will agree on a fixed purchase price based on a set of accounts made up to a specific date and no further adjustments are needed following completion. The economic risks transfer to the buyer from the ‘locked box date’ however the seller continues to run the business between the locked box date and completion of the transaction. However, the Seller must also undertake to be responsible for any ‘leakage’ since that date. ‘Leakage’ being monies or assets transferred out of the Company to their own advantage. This way, the Seller can’t asset strip the Company after the price has been agreed based on historic accounts.

Completion Accounts Mechanism

On the other hand, the completion accounts mechanism is when the purchase price is not fixed on completion and further adjustments will be necessary post-deal. This is done by preparing completion accounts based on the business’ balance sheet as at the date of Completion itself and then adjusting the purchase price based on the net assets or current assets of the Company (often a ‘cash/debt free’ or ‘Net Asset’ adjustments). An agreed amount will be paid on completion by the buyer, and the buyer takes control of the business and runs the risk from the date of completion. Completion Accounts are then prepared and an adjustment is made either way.  The Completion Accounts mechanism has become more common in more complex transactions as it enables the parties to go into greater detail and confirm a fair purchase price as at Completion itself as opposed to a historic date in time. However, when choosing the completion accounts there is still potential for disputes following completion when the accounts must be prepared and agreed which also comes with additional costs. The Seller also needs confidence that the balance of the purchase price will be paid and may also seek some form of security for this.

Either way, it is important to ensure that your team understands the practicalities of these mechanisms, the risks to you and how to mitigate these. Of course, these are just two of the potential Purchase Price mechanisms that could apply to your transaction. If you want to know more about these and purchase price adjustments from a legal perspective, please contact our Business Services Team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

Every transaction, whether a share sale, business sale, management buy-out, merger, share scheme (the list goes on!) will be governed by legal documents. These are essential to governing the relationship between the parties and sets out what has been agreed. This is important not only in relation to any ongoing matters between the parties post-deal, but also to any third party onlookers who may need to know about the transaction (in particular, HMRC).

What documents are included?

The actual documents that can be expected will vary between transactions, depending ultimately on the deal structure you are agreeing and what you have to sell. However, typically these may include:

1. Pre-Transaction Heads of Terms and NDA – these are designed to set out the headline terms of the deal and protect your information during the disclosure process.
2. Purchase Agreement – this will govern the operative terms of your transaction including the purchase price, when this is due and the warranties and assurances that you will be required to give the buyer as a part of the transaction. It may also include a tax covenant and a mechanism to adjust the purchase price based on performance.
3. Disclosure Letter – this is a formal letter from a seller to a buyer setting out any facts or circumstances which contradict a contractual warrant being asked of them. Where something is properly set out in the Disclosure Letter, the buyer acquires the business in that knowledge and cannot then claim against the seller in respect of that issue.
4. Service Agreements and Settlement Agreements – if you are also an employee of the business, it may be that your employment needs to be terminated on completion. Similarly, if you are going to continue to provide services post-completion then you may require a service agreement to govern this relationship.
5. Property Transfer Documents – if there is going to be any change to property ownership in the transaction, you will need documentation to deal with this. This may include a TR1 and contract for sale if transferring the freehold or registered lease, or a Deed of Assignment and Lender Consent if transferring a lease. This is particularly key if undertaking a ‘business sale’ or ‘asset transfer’
6. Contract Assignments – you may need to transfer rights or obligations from one party to another as a part of the transaction, particularly if a ‘business sale’ or ‘asset sale’. This can include assigning intellectual property, goodwill or even contracts with customers or suppliers.
7. TUPE Notices – if you are undertaking an ‘asset transfer’ or ‘business sale’ and have employees, you will need to notify them in accordance with their statutory rights and your statutory obligations.
8. Ancillary Documents – in addition to the operative purchase agreement, you may also need various ‘ancillary’ documents to effect the transactions it anticipates. This would include stock transfer forms, board minutes for any companies involved in the transaction, resolutions that are required to be passed, powers of attorney and indemnities for any lost/unissued share certificates, directors consents and resignations and notices for changes of persons of significant control. What you actually need will vary on each transaction.
9. Companies House returns. If you are selling a company, there are certain returns that need to be filed at Companies House within statutory deadlines.

Who is involved in this process?

Your legal team is key to drafting, negotiating and amending these documents. The buyer and seller have adverse interests in a transaction and therefore it is important that you appoint an independent solicitor to advise you in the sale and negotiate the documents on your behalf to ensure that they also include adequate protections for you as a Seller and that you are fully informed of the risks of proceeding. They will also work closely with your accountant and other advisors to ensure that they also account for any tax or accounting elements that need to be accommodated.

If you want to know more about the process of selling a business and how we can support you…please do contact Holly Threlfall or the team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

Now you know what is involved in selling your business, you know how important it is to have the right team around you to guide you with each element of your transaction and ensure the best outcome for you.

Once you have resolved to sell your business and decided on a structure that is going to suit you, the next stage is finding a prospective buyer and agreeing Heads of Terms. Taking your business to market can be a daunting process; especially as it is something many owners of private companies may only do once! But you are not alone in this process and the broker that has helped you construct the right valuation and deal for you can also assist in taking your company to market in a discreet and confidential manner.

Once you have found a buyer, the next thing you will need to agree are Heads of Terms.

What is the point of Heads of Terms?

Heads of Terms set out the principle terms of the deal that the parties are committing to negotiate. Generally speaking, they are ‘non-legally binding’ and should be drafted so that the majority of clauses (with a few exceptions) are subject to contract. Whilst it may seem unnecessary to negotiate an ‘agreement to agree’ the point of Heads of Terms is not to get into the devil of the detail for the transaction, but to outline the basic principles of the deal, timescales and responsibilities. After the Heads have been agreed, you then get into the due diligence stage of the transaction which will further influence what detail needs to be contained in the transaction documents themselves.

Why aren’t heads legally binding?

The majority of clauses in Heads of Terms aren’t legally binding as it allows:

1. The parties to incur substantive costs in the knowledge a deal has been agreed in principle
2. The parties to seek and further negotiate the terms of the deal when they have the benefit of responses to due diligence enquiries

What is in Heads of Terms?

As every deal structure is different, the provisions contained in the relevant Heads of Terms will vary. However, there are a few fundamental provisions that you would expect to find in Heads including:

1. a paragraph setting out the structure of the deal, the proposed purchase price and when this is due
2. an outline of the expectations in terms of due diligence enquiries
3. an outline of the expectations of the Purchase Agreement and who is going to prepare it
4. a legally binding confidentiality clause
5. a legally binding exclusivity clause
6. a legally binding costs and jurisdiction clause

What is an NDA

An ‘NDA’ or ‘Confidentiality Agreement’ is an agreement designed to protect both your information and the Company’s. It commonly involves:

1. an obligation to keep information secret; and
2. an obligation to only use information for a specific purpose.

This may be included within your Heads of Terms or you may have a standalone agreement. Either way, it is essential before proceeding that you have a comprehensive legally binding provision in place.

Who is involved?

Typically, the buyer’s solicitor would prepare the Heads of Terms for a transaction. That being said, your broker, agent or CF advisor may also commonly prepare Heads of Terms and certainly would be involved in considering and commenting on the purchase price, deal structure and how this is constructed.

If you have been presented with a set of Heads of Terms or need assistance navigating your sale, please don’t hesitate to Holly Threlfall or the team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

What next?

Once you have signed Heads of Terms, it’s time for the parties to move onto due diligence enquiries.

Selling a business can be daunting. There are a multitude of considerations that you will need to have, decisions to make and unfamiliar processes to engage in. If you want a successful sale you need to prepare not only your business but yourself for the sales process. Doing so will not only maximise on your sale value, but reduce stress and anxiety by ensuring that you are fully appraised and confident in the decisions you make. In this series, I am going to consider five key elements of any transaction that a Seller will need to consider:

1. Determining the structure of transactions
2. Heads of Terms
3. Due Diligence Enquiries
4. Transaction Documents
5. The teams involved in your transaction

Transaction Structures

Transactions can have a multitude of different structures and each deal will need to be tailored to you and impacted by how you have operated to date. However, there are two key principle ‘sale structures’ commonly adopted: Share Sales and Business Sales. Although each transaction will follow the same pathway of heads of terms, due diligence and transaction documents the actual documents themselves and risks involved in each transaction does vary significantly.

Share Sales

A Share Sale is more commonly preferred by Sellers where you have operated through an incorporated company. This is where you personally sell the shares that you own in your company to your buyer. The business itself remains ‘intact’ and therefore no property transfers, TUPE transfers or contract assignments are required which can help preserve the continuity of business and cause less disruption to the day to day running of the business.

Business Sale

A ‘Business Sale’ or ‘Asset Sale’ (which are very similar in nature) is where an individual or a company sells the components or specific assets which together make up a business. Whilst this can be a lower risk from a buyer perspective, it can cause more disruption to the business as you have to transfer each asset and obligation to the buyer for them to continue the business and may involve TUPE transfers, property transfers and contract assignments.

Which is Best?

There are pros and cons to both structuring the deal as a Share Transaction or a Business/Asset Transaction.

Structuring the deal as a Share Transaction may:

1. be more tax efficient for a seller
2. involve a higher level of due diligence and disclosures
3. involve a substantial number of documents to effect the share transfer and change of ownership itself
4. increase the risk to a buyer as they inherit both liabilities and assets
5. cause less disruption to the operation of business itself

Structuring the deal as a Business Transaction may:

1. enable the buyer to ‘cherry pick’ assets and ‘leave behind’ certain liabilities
2. involve more documentation to physically transfer the assets to the buyer
3. cause more disruption to the business, especially if there are employees who need to be consulted on the pending transfer of the business
4. involve more costs for the buyer, especially if property needs to be transferred which could incur Stamp Duty Land Tax
5. Reduce the direct liabilities of the individuals involved in the deal if they operate through a selling company

Ultimately, every transaction will be different and what works for one set of parties may not work for another. It is about balancing the risks and benefits of the parties in each deal to agree a structure which both are happy to proceed on.

If you would like to know more about structuring deals and considerations in a pending sale, please don’t hesitate to contact Holly Threlfall or the team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

Who can help you with your structure?

Planning the structure of your transaction involves not only your solicitor, who can advise on the various risks and accountant, but also a broker (usually an expert in Corporate Finance) who can help with only valuing your business; this can be impacted by many factors including turnover, profit, industry multipliers and net asset value). Having an agent on hand who can help you construct a the deal in a manner that suits you and help you handle any key negotiation points early on is key to lining up a successful sale

What next?

Once you have agreed a structure in principle, it’s time to move onto Heads of Terms.

1. Preparation – as with anything else in life, preparing your business for sale is key. From preparing for the due diligence process to planning the sale structure and your exit plan, this is fundamental to maximise on your sale and prevent your buyer from chipping away at your purchase price.
2. Value your business and find a Buyer – A Corporate Finance Advisor can assist you with this process and finding the right buyer and structure for your deal. You should ensure that you have in place a comprehensive Non-Disclosure Agreement to protect your company’s information and know-how. Once you have found a buyer and agreed a purchase price and structure in principle, this should be documented in the Heads of Terms. These are largely non-legally binding but it is important to make sure the headline terms are agreed to prevent any protracted negotiations on your deal.
3. Due Diligence Enquiries ­– Your buyer will raise a series of questions about your business, its assets and historic trading position. It is important to answer these honestly and carefully to ensure that you are not exposed whilst ensuring the Buyer has sufficiently detailed information to assess the purchase. We can assist you with this process through management of a data room for you to provide your responses through.
4. Legal Documents – Your transaction will contain a series of legal documents from your sales contract (which may take the form of a Share Purchase Agreement or Business Sale Agreement depending on your structure) through to a Disclosure Letter and ancillary documents required to effect your transaction itself. These need to be carefully drafted and negotiated to ensure that you know what you are signing up to.
5. Completion – This is where all of your hard work pays off! Exchange and Completion is often simultaneous in these deals, so the point where you are legally bound is also the point where you hand over the keys to your business. Of course, in most transaction you usually receive the proceeds of sale (or part of it) and you can begin planning your next endeavours!

For all enquiries relating to the sale or purchase of a business, contact our expert Corporate team on 01604 828282 / 01908 660966 or email Corporate@franklins-sols.co.uk.