When selling a business, it makes sense to present your business at its best. Your contracts are extremely valuable. By planning your sales strategy and ensuring that you have key documents prepared, you will strengthen your negotiating position and be more likely to secure key commercial terms.
If your key documents are not up to scratch then you risk of a buyer either reducing the purchase price, or worse, walking away from the deal.
Heads of Agreement
Key terms are usually recorded in signed heads of agreement. For the most part, heads of terms are not legally binding but it is usual to expressly specify certain clauses which are legally binding, such as:
- A confidentiality clause
- An exclusivity period
- An exclusivity fee.
As the buyer will naturally invest time, money and resources in trying to negotiate the deal, exclusivity periods are common because they give buyers time and protection to carry out due diligence investigations and thrash out contract negotiations.
Confidentiality arrangements are crucial to safeguard the exchange of any confidential information that you provide about yourself and your business. Without one, your information may be at risk of being passed on by an abortive buyer if your proposed sale falls later through.
It’s best not to leave anything to chance in the early stages of negotiation. Getting specialist legal advice to accurately record the key agreed terms and legally binding clauses is money well spent.
You will also want to check the credit worthiness of potential buyers at the earliest opportunity – eliminate prospective buyers who cannot pay. Check the details of the offers on the table – make your choice, but keep other buyers lined up in case the deal falls through. Remember it’s not just about money – a particular candidate may be a safer pair of hands to secure the future of the business.
This groundwork also speeds up the sales process later on. Heads of terms can be reflected in the formal sale contract and confidential information relating to you and your business will be adequately protected.
Due diligence investigations will look into the legal, operational and financial aspects of your business. Bad planning and paperwork can have a significant impact on the negotiation process – so sellers should ensure that all key documentation relating to the assets, accounts, financial records, employees, suppliers and contracts of the business are in good order.
By getting your key legal documents in order you can facilitate a smoother due diligence process.
Check your current contractual standards of services. Avoid obligations which may appear unnecessarily onerous and replace “best” endeavours with “reasonable” endeavours where required.
Check whether your intellectual property rights are sufficiently protected. Are all necessary IP ownership and licence documents in place?
A buyer will also want to avoid arduous monetary remedies should there be a future failure in service provision. So check your remedies clauses.
So far as your staff and customers are concerned, if there is a risk of your customers poaching key members of staff then it makes sense to bolster your contracts. Confidentiality clauses too should be inserted to adequately protect you from sensitive information being divulged.
A buyer will want to see that long term contracts remain commercially viable going forward – so check whether you have the right to implement price increases?
Check your retention of title to goods. If you sell goods, then you can retain ownership prior to the goods being sold on.
Check that the buyer is happy with the indemnities given by you to customers (and how they are capped).
You don’t want to lose a contract purely due to a delay in delivery so avoid time of the essence clauses where you can.
Regarding contracts where you are the customer, then a potential buyer will want to avoid contracts which require minimum volumes, supplier exclusivity and which have commercially owner’s payment terms.
Check whether you have rectification of mistakes at no costs and service credit clauses. You want to ensure that you have sufficient remedies in place if your supplier does not deliver.
A buyer will be looking for broad termination clauses so that they are not tied into long term supplier contracts. Are you able to terminate a contract for convenience?
Check that your contracts do not allow for overseas jurisdictions. A buyer will want to limit liability and jurisdiction to England and Wales.
Dependent on the sale structure, this will either be share purchase agreement or business and assets purchase agreement.
The sale contract comprehensively documents all of the terms upon which the sale will take place. The transfer of ownership in shares or assets is detailed here. The key commercial terms which were set out in the heads of agreement are formally recorded here, together with any necessary legal protection that the parties require.
This is usually a very lengthy document which details:
- How the purchase price is to be achieved and the payment mechanism (completion accounts)-
- On a business sale (the transfer of assets)
- Consents and/conditions which must be acquired or fulfilled prior to completion
- Any restrictive covenants enforced on the sellers
- The completion procedure
- Warranties and indemnities
- Specialist areas including properties, pensions, employment and intellectual property rights
- Limitations on the seller’s liability
- Additional buyer protections
- Provisions dealing with how the business will be run between exchange and completion.
- The sale contract will contain the seller’s warranties – detailing those promises that the seller is being asked to make in respect of the business being sold.
Again, it is usual at this stage of negotiations for the parties to re-evaluate the purchase price and terms.
The seller can qualify the warranties by either reducing the scope of the warranty itself or by making specific disclosures against it (and the disclosures are particularised in the disclosure letter and supporting bundle of documents).
Take great care over the wording and what is covered by the warranties and indemnities. Your legal team should draft the disclosure letter to limit your liabilities and a vendor protection schedule to limit the time period within which they apply.
This requires the seller to indemnify the buyer for any pre -completion tax liabilities which do not arise in the ordinary course of business or which have not been disclosed in the accounts. There is no tax deed on a business sale since the buyer does not inherent the businesses tax position.
In almost all share sales there will be a deed of tax indemnity and this will either be a separate document or referred to in a schedule to the sale and purchase agreement.
Third Party Consents
The seller will need to check whether any specific third party consents required pursuant to any material contracts.
This would include agreements with key customers and suppliers which contain change of control clauses. Another example would be in relation to a share sale where the business occupies a leased property and the lease requires the landlord’s consent if the identity of the tenant changes.
Again it’s prudent to identify potential obstacles early on. Often simple issues like consent can become major stumbling blocks if the need for consents is only identified late on during the due diligence process. It is also important to note that some regulatory consents or consents from overseas parties may take several months.
So check your non-assignment clauses.
You don’t want to lose a deal because your contracts are not in good order, so you should always seek expert advice if in doubt. Take time to plan your selling strategy, assess the risks, set clear objectives and an action plan for achieving them.
Final Words: Key Legal Documents When Selling A Business
Selling a business is often more complicated than at first glance. In this blog post, we’ve covered the key legal documents when selling a business so you’ll have more confidence about selling your business in the future.
Need more legal advice? Then get in touch with us for a free Startup Legal Session.