As part of your deal team, you will engage a solicitor to be your legal eyes and ears during the sale process, especially in creating the heads of terms and thrashing out the purchase agreement. While your lawyer will do the heavy legal lifting for the deal, as a seller you should have some familiarity with legal terms and concepts in advance.

Protect your business IP

Make sure you have a confidentiality agreement or NDA in place from the outset. This means that as you share information about your clients and relationships, and about what makes your business successful, you should be protected, especially if the transaction doesn’t proceed. You will be sharing information with various parties before alighting on a preferred buyer, so it’s important not to skip this step.

Understand what heads of terms is

A heads of terms document – sometimes called a letter of intent or a memorandum of understanding – sets out the fundamentals of the deal in prospect. As a legal document it is largely non binding with a couple of exceptions: one is the confidentiality aspect, as you are on the cusp of divulging deeply sensitive business data during the due diligence phase; the other is an exclusivity clause that allows the buyer a period (typically around three months) in which to perform due diligence without fear of competition. Being found talking to other potential buyers during this time is likely to incur a financial penalty, and may jeopardise the deal .

Understand what a purchase agreement is

This is the completion agreement, the legally binding contract between buyer and seller that sets out the exact terms of the deal. It will detail the structure of your transaction, including transfer of clients in the case of an asset sale. It will also spell out any warranties, indemnities and covenants. Your specialist financial advice M&A broker can talk you through the options.

How to negotiate a purchase agreement

The purchase agreement will be drafted by the buyer and will naturally be slated towards protecting their position more than yours.  Your solicitor’s role is to protect you from unnecessary risks, whilst also being pragmatic about the market position.  This will include timeframes for warranties, indemnities and restrictive covenants.  Details on how future payments will be calculated are an essential element of the contract. Alongside the contract you will provide ‘disclosure’ documents. This is a detailed process and essentially allows you to make the buyer aware of certain things (such as ongoing complaints) to avoid any redress later.

Setting the purchase price

A common stumbling block in dealmaking is agreeing the price. Recurring revenue, EDITDA and assets under management mean different things to different people, so it’s likely that the  buyer’s deal team may question some of your own valuations. You should expect and prepare for some adjustments, exceptions and exclusions to come out of the due diligence process. The sooner you and your solicitor can get clarity on the buyer’s view of the real business value, the easier it will be to sensibly negotiate a mutually agreeable figure. You will also need to agree a structure and conditions for initial and future tranche payments for your company. These details need to be laid out clearly and unambiguously in the purchase agreement.

warranties, indemnities and covenants

The buyer will want some assurances in exchange for buying your business. Warranties will cover rightful ownership of the business and tax compliance. You will need to give the buyer certain assurances about their understanding of the business offered under warranty – a process known as disclosure. Indemnities are specific protections a buyer may seek to shield themselves from advice given under your ownership. These should relate to particular issues (staff, leases, regulatory non compliance etc) and you should be wary of blanket indemnities. Tax covenants are pretty standard and allow the buyer to seek recourse if HMRC wants to collect dues from the time of your ownership. Non-restrictive covenants are there to stop you poaching back your old clients after the business has been sold, hiring staff from the new owner or engaging their suppliers. The latter will likely be in place for two to four years. While many of these protections are for the buyer’s peace of mind, you should seek to set limits on your liability in the agreement too.

 

Gunner and Co. run regular workshops and webinars by industry professionals to help business sellers make the best sale possible. Find out more here.