You have decided to go ahead with a vital commercial expansion and are at the point of considering how best to prepare for a merger and acquisition (‘M&A’). So where should you start? As with any commercial planning, robust preparation is vital.
Share purchase or asset purchase?
Whether you are seeking to exploit a business opportunity by merging with a failing company or to acquire another business to consolidate your growth or to outwit potential ‘Brexit’ problems, you need to consider what strategy will best meet your business aims.
There are two main ways to consider buying your target business:
- Share sale – This is where you buy all the shares in the target company; or
- Asset Sale – This involves purchasing the business as a going concern, along with all or some of its assets.
You will no doubt be investing considerable time and money investigating the target company and it is sensible to ensure that you are protected from rival buyers by having some form of exclusivity period. There may well be sharing of confidential information and it is therefore important to ensure that this information cannot be used for any other purpose other than in connection with the potential merger or acquisition. Therefore, you should consider whether it is appropriate to request the target to enter into a confidentiality or exclusivity agreement.
Effective due diligence
Due diligence is a key step and involves carrying out appropriate checks and investigations of the target business in connection with legal, financial and accounting matters. Do you know, for instance, what you will be taking on? Are you familiar with the target’s customer base? Is it as profitable as it was a year or so ago?
Due diligence provides the opportunity to assess the risks and liabilities of the target. You can then assess whether the risk is of sufficient magnitude that it may lead to the M&A being abandoned or whether this can be adequately protected and apportioned in the purchase agreement.
Once you have considered the potential risks you should consider how these would be managed? Assurances from the target company in relation to risk are vital because there will always be a level of uncertainty about risk after completion.
This means you will need to secure effective warranties and indemnities to protect you post-completion. A warranty is a contractual promise or factual statement in the final purchase agreement in relation to the target’s business assets and liabilities, while each party agrees to indemnify the other in the event of a breach.
Warranties and indemnities are good ways to apportion risks, however, there may be levels of risk that you are unwilling to tolerate or you require some form of security to ensure that you are compensated if you need to bring a claim. For example, you may require a portion of the purchase price payable in respect of the acquisition be held back in escrow for a period following completion. The escrowed monies are then available where any claims may arise following completion.
The purchase agreement is a key document for the sale and purchase of a business. Generally, there is no requirement for the sale and purchase of shares or assets of a business to be in writing. However, English law provides a buyer with very little protection regarding the nature and extent of the assets and liabilities it is acquiring, and so the principle of caveat emptor (buyer beware) applies. It is therefore advisable to put in place an agreement documenting what has been agreed between the parties.
The agreement will generally detail what is being sold and specify the obligations of the parties. As the final purchase agreement will be a legally binding document, you will need to consider what terms should be covered. This requires skilful negotiation to achieve clear, unambiguous terms which protect you and minimise the risk of any future dispute. Generally, the agreement will deal with the following issues: documenting the terms of the M&A, specifying any conditions that apply to the M&A, the allocation of risk and protection for the buyer from competition post-completion. The final terms can take some time to agree between the parties, but it is vital to get them right.
What you should do
With so much at stake, it is vital to take specialist M&A advice as early as possible. Our experienced corporate, commercial and IP solicitors would be happy to assist.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.