Selling a Privately Owned Business – Briefing 15 – Legal Completion
So, the deal has been agreed, the Heads of Terms has been signed and due diligence is underway. You’re in the completion phase of the sale!
Your solicitors will now be drafting the legal documentation which governs the sale, the fundamental document being the legally binding Sale & Purchase Agreement (SPA).
Here are ten pointers to assist in guiding you through the completion phase of your sale.
1. The SPA fully defines the structure and terms of the deal. The main purpose of this document is to protect each party against unforeseen events occurring after sale completion, and to define the consequences of any such occurrences.
2. The SPA will be driven mainly by the buyer, who is taking the risk in purchasing the business. The buyer will include in the SPA clauses referred to as warranties, which are declarations of fact given by you as seller about the business. The SPA defines the protection given to the buyer if any such warranty is subsequently breached by being found to be incorrect or untrue. Warranties are always the most heavily negotiated aspects of the SPA.
3. The SPA will also include indemnity clauses. These provide guaranteed protection for the buyer against a specific liability. Typically indemnities involve a payment by the seller to the buyer to compensate for losses caused by breaches in an agreed provision. Generally any payments under an indemnity clause will be made on a “£ for £” basis.
4. A key aspect of the legal completion process is “disclosure”. This is a process whereby you as seller make known to the buyer any appropriate matters about the business, which, being declared during due diligence, are then excluded from the warranties. These disclosures are usually collated into a formal “disclosure letter” supported by appropriate documents. One effect of disclosure is that you as seller are able to discuss any matters arising directly with the buyer, which you can then address together as appropriate before completion.
5. Other key clauses in the SPA are known as “exclusion provisions”. These collectively outline the basis on which you, as seller, will transfer the business to the buyer. These will include how the consideration for the business will be paid, including any deferred consideration, earn outs and the basis on which price adjustments may take place.
6. Finally, there are other types of clause, referred to as “covenants”. Covenants regulate the actions of both buyer and seller, including agreements to take (or not to take) certain actions. Covenants also form the basis for closing conditions and termination provisions.
7. The SPA is not only about the buyer. It will also give you, as seller, protection against future unreasonable claims by the buyer. It is essential that these clauses are drafted carefully, as effectively when you sell, you will be “swapping” the limited liability of your company for personal liability under the SPA.
8. There will also be another document, concurrent with (or sometimes an addendum to) the SPA, which is the Tax Deed. When acquiring a company, the buyer will inherit the tax liabilities of that company. The tax deed protects the buyer, as you as seller effectively promise to pay the buyer an amount equal to any pre-completion tax liabilities. One purpose of the Tax Deed is to allow the buyer to recover any such tax liabilities without having to prove fault.
9. Depending on the size and complexity of the sale, there may be other documents running alongside the SPA. For example, in almost all cases there will be a Service Contract, which is a formal contract defining the basis on which you as seller will work with the buyer during a handover period during post sale.
10. When the completion phase is coming to an end, and the SPA and attendant documents have been prepared and agreed, a date will be set for formal completion. This may involve an actual meeting between all parties, or increasingly commonly now, this is done remotely, with each party attending at their respective solicitor’s offices, with completion taking place electronically. Either way there will be a number of ancillary but important practical documents to sign, for example director’s resignations, the actual share transfer forms, and board minutes.
This final completion phase is vitally important to you as seller, and you should always be advised by specialist M&A solicitors. However amicable the deal with the buyer may be, your interests should always be fully and properly protected in the event that something unforeseen goes wrong at some point after sale. A weak SPA can cause significant problems at any future date should things not go as expected. Expect the unexpected!
8 October 2018