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.

So you’ve found a buyer and agreed Heads of Terms, now it’s time for the hard work to begin! From my experience, the most commonly underestimated work-load in the transaction is legal due diligence enquiries. Accounting and Commercial due diligence often starts at the Heads of Terms stage as the buyer uses basic enquiries and a combination of assumptions to reach a price they are willing to pay in principle. However, before actually proceeding they will want to know everything about how your business operates.

What questions are they likely to ask?

Legal due diligence will vary depending on the nature of the business, size of the transaction and how the deal is structured (there is usually reduced due diligence for a business purchase as compared to a share purchase, but this isn’t always the case). Typically, legal due diligence covers the following topics:

1. Corporate Structure and Records – this is the background to your company, how it is set up and managed, what it’s governing documents consist of and compliance with statutory registers and records.
2. Share Capital and Shareholders – this is crucial in a share transaction and will enquire into who actually owns the shares being sold and any matters that may impact those shares.
3. Accounts and reports – this covers the Company’s historic statutory accounts, practices and management accounts since the last statutory accounts. It also considers any forecasting or budgets and changes since the last accounts date.
4. Finance and Banking – this is designed to gather information in relation to the financial facilities available to the business or needed to operate it (e.g. credit cards, overdrafts, grants, long-term loans, invoicing or other facilities) and even without any of these at the very least the bank accounts the business uses and cash in the bank.
5. Business, contracts and trading – this section is fundamental in any transaction as it covers the contractual arrangements that the business has and needs to trade. Crucially, a buyer needs to know about any material contracts and ensure these will continue.
6. Assets – this covers the equipment, plant and machinery the business needs to operate. It can also extend to stock levels.
7. Real Property – this covers the premises used to operate the business from and captures information regarding leasehold and freehold interests. It is common for this to extend not only to basic questions to understand what there is but appropriate Commercial Property Standard Enquiries (CPSE’s) in relation to those premises.
8. Intellectual property – this covers what intellectual property is used by the business, who owns it and any licences required.
9. Information Technology – this covers the computer systems used in the business, their maintenance and any vulnerabilities. This has become particularly crucial in recent years with the growth of cyber-attacks.
10. Data Protection and privacy – this is geared at compliance with strict statutory obligations in relation to how personal data is stored and processed. Particularly in view of the changes in GDPR!
11. Insurance – the buyer needs to ensure adequate insurance, the types of claims historically brought and any residual issues they may inherit
12. Regulatory compliance and consents – this is more key in businesses which are subject to a regulatory authority. For example those subject to FCA authorisation or SRA Registration. But this can also cover Premises Licences and Waste Carrier Licences. In effect, any governmental authority or consents required to run the business.
13. Litigation – any buyer will want to know about litigation that has been issues and which could impact the target they are acquiring.
14. Employment – employment law is a very niche topic and there are a whole host of laws which apply when you engage employees and these questions are designed to understand not only what employees are needed to run the business, but also ensure compliance with all laws. This can be particularly key in a business sale where ‘TUPE’ applies. If you want to know more about this, do contact our employment team who would be happy to help!
15. Retirement Benefits – just as employment law needs to be covered in view of the legal requirements to provide a pension scheme and auto-enrolment obligations any buyer needs to fully understand what has been effected and what their ongoing liabilities may be
16. Environment, Health and Safety – it is important for a buyer to understand about what health and safety procedures you have in place and environmental factors which may impact the business. In particular, what environmental and health and safety laws apply to the type of business they are acquiring and how they have been complied with. From cleaning products to storage of sewage tanks, the buyer will want to know what impact these have on your business.
17. Anti-Bribery and Corruption – There is strict legislation in place around bribery offences therefore a buyer will want to know what measures you have taken to prevent this.
18. Tax – compliance with tax legislation is important to any business and the buyer will want to understand not only how this has been dealt with historically, but the taxes due and any exemptions that have been applied. For example, capital allowances that have been claimed, some services or supplies are VAT exempt or sometimes R&D claims have been applied for. They will want to know this.

Who is involved in this process?

Primarily, you will be heavily involved in this process as you, together with your staff and managers, will know how the business operates and be gathering this information. Some of it, your accountant may also be able to assist with and we would work with you to manage the disclosure process.

How to manage this process?

Managing the due diligence process is daunting – particularly when you are trying to sell your business without any third parties (particularly staff, suppliers and customers) finding out about the transaction. This can therefore be one of the most stressful parts of a transaction. Technology can help with the provision of secured data rooms which makes it easier for information gathering and sharing but at the end of the day there is always going to be a fair bit of leg-work on your part! This can however be made easier if you plan to sell in advance of having a buyer lined up. We do offer a service where we can work with you to undertake this process with you before your buyer comes on board. This enables you to undertake due diligence at a manageable pace with less pressure. It also gives us the chance to review responses and advise on any potential issues we identify so that they can be rectified before you have a buyer. For instance, many companies don’t maintain statutory books which is a fundamental legal requirement and could cause an issue with your buyer.

For more information on our legal due diligence audit service and how we can help you prepare for a sale, please contact Holly Threlfall or the team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

What next?

Now we move on to preparing the documentation.

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.

I often get asked what the benefits are of a share sale over an asset sale. The truth is, there are pros and cons to each structure and you need to ensure whatever route you take is the right one for you. However, I have outlined a few key factors to consider below:

In an asset sale:

1. The buyer ‘cherry pick’s the assets they need to run the business. This can include real property, physical assets and equipment, specific contracts, intellectual property, branding and goodwill. Any real property transferred would be subject to stamp duty at applicable rates.
2. The seller usually retains liabilities (unless otherwise agreed) and still needs to discharge these. This includes any tax liabilities due to HMRC.
3. If the seller is your company, the company is the contracting party and your liability is limited as an individual (unless you give a personal guarantee)
4. Employees are required to transfer to the buyer’s employment under regulations commonly known as ‘TUPE’.
5. Other contracts will need to be individually assigned or new contracts (such as insurance) taken out by the buyer. Customers and suppliers therefore will need to be notified and this can interrupt the continuity of business.

In a share sale:

1. The ownership of the company changes, not the ownership of its assets. Your company continues to own all of its assets.
2. Contracts with the company remain in place. This can preserve continuity of business, as usually there is no need for assignments or new contracts to be entered into. The employees also continue to be engaged by the Company without the need to apply the TUPE regulations.
3. Just as assets remain in place, all liabilities also remain in place and the buyer indirectly assumes these. This is why due diligence on a share sale needs to be particularly thorough.
4. Provided you qualify and the transaction is properly structured, the proceeds of sale are subject to capital gains tax rather than income tax. This means you may also qualify for Entrepreneurs Relief which can have a substantial impact on reducing your tax liability.
5. A buyer is required to pay stamp duty on the transaction, this would be at a rate of 0.5% (rounded up to the nearest £5.00).

For further information in relation to a business sale, contact Holly Threlfall and the Corporate team on 01908 660966 / 01604 828282 or email Corporate@franklins-sols.co.uk.

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.