Business in Britain: Selling a business or company in Britain
From a due diligence viewpoint, the issues of selling a business or a company is mentioned below:
ASSET SALE OR SHARE SALE:
The form of sale transaction is generally decided by commercial issues like taxation, etc. where structure chosen depends upon the specific circumstances of the seller and the buyer.
Tax issues shall be given due consideration at initial stage only, so as to avoid expenditure being incurred in pursuing what ultimately turns out to be the wrong course of action.
MANAGING THE TRANSACTION:
The sale of a business is much a team work comprising of the:
- its lawyers, and
REVIEWING SELLER’S BUSINESS:
The seller has two objectives in a disposal:
- to maximise the post-tax sale proceeds, and
- to minimise the on-going exposure of the seller to the buyer.
To achieve this, the buyer will conduct a detailed and vigorous examination of the business.
The areas that a review should cover depend on the relevant business, but should include some or all of the following:-
- Financial: Statutory and management accounts; financial history; budget forecasts;asset values and basis of valuation; tax position and liabilities; borrowing arrangements; off-balance sheet items; shareholdings (on a share sale).
- Legal: contract review; property review; corporate review (on a share sale); validation of a number of areas covered by paragraphs a, c, d and e.
- Trading: plant and equipment details; business volumes; major customer details; major supplier details; contracts and trading terms; market information; agency arrangements; intellectual property details, protection status and licensing.
- Personnel: payroll details; general and individual employment/service contracts; trade union organisation and bargaining rights; redundancy arrangements; pension arrangements; other benefit details.
- General: premises details; environmental liabilities; contingent liabilities; research and development programmes and status; operational/commercial issues; areas of risk; strategic issues if the seller’s business is being merged with the buyer’s business.
HEADS OF TERMS (Memorandum of Understanding):
This is a non-legally binding document which is used to establish the business understanding of the deal; providing the parties with realistic expectations of the contents of the full contract.
Confidentiality undertakings shall be obtained from any prospective buyer. This shall be done before any information is supplied by the seller. Further, this not only imposes confidentiality obligations on him but also restrict hi from the use by of that information for the purpose of the evaluation of the business with a view to agreeing a contract for its purchase. If there is a breach, the other party of a business would invariably wish to obtain an injunction rather than sue for damages.
It refers to investigation of a business by a prospective buyer before entering into a contract.
- It picks up undisclosed liabilities:
It is based on the principle of caveat emptor, according to which if you buy shares in a company, you buy the company with the liabilities that are in it.
- It helps with price negotiation:
Due diligence can assess whether these assumptions are valid. Further, the quality of the due diligence exercise will reflect the strength of argument in the re-negotiation of the price.
- Assists drafting of Sale and Purchase Agreement:
Due diligence help to identify the particular liabilities in regard to indemnities and warranties (sought by the buyer) that further allows the lawyer drafting the contract to understand the issues surrounding the relevant business and to draft the contract accordingly. It should be carried out before drafting of the main Sale and Purchase Agreement.