A Guide To Completion
This is part 3 of our guide to Selling Your Business. The concluding part. In part 1 we discussed getting sale-ready. In part 2 we discussed getting to Heads of Terms and assembling your team. We now move to discussing the final phase; due diligence, sale documentation and completion. We also discuss common reasons why transactions fail or ‘abort’.
In part 2 we discussed giving the buyer exclusivity for a period after Heads have been signed. That period is to give the buyer time to:
- Conduct due diligence.
- Negotiate the sale documentation (including the all-important Sale and Purchase Agreement (‘SPA’).
If both workstreams align in agreement, then the transaction will normally reach a successful Completion. If they do not, the transaction may abort.
The workstreams are inter-twined as the SPA will (among other things) provide legally binding support for due diligence.
Share sale/asset sale
We have focused part 3 on share sales. However, the concepts are equally applicable to an asset sale with certain nuances as asset sales do not transfer the entire corporate history of the business.
Due diligence involves the buyer doing an in-depth investigation of the business. Normally this covers all legal and financial arrangements (including accounting and tax).
For a seller the due diligence process is intrusive and burdensome in itself and at the same time the seller must continue to run the business. Both must be done with a high degree of care as any failure on either can have a material impact on the saleability of the business or on the terms agreed in the Heads.
Getting sale-ready in advance of due diligence (part 2) will save the seller time in collating information and will also have enabled the seller to identify and possibly rectify issues in advance.
Adverse issues which are revealed by due diligence and which were not factored in at Heads are the most common reason for a transaction to abort.
Although the transaction will generate numerous ancillary documents, the SPA is the linchpin document which governs all others. As well as dealing with price (which we dealt with in detail in part 2) it also deals with three other key areas:
- Protection of goodwill/restrictive covenants.
- Liability provisions under which the seller can be liable to the buyer after Completion.
- Limitations on those liability provision to protect the seller.
Protection of goodwill/restrictive covenants
To protect the value of the business the buyer will wish to place restrictions on the seller’s ability to damage it for a period after Completion. Typically, this involves the seller agreeing not to compete with the business or poach or engage staff for a period after Completion (normally 12-36 months).
These provisions are generally not contentious, and the seller should identify anything that it will want to do after Completion so there is no conflict or if there is a conflict it is made an exception in the SPA.
The seller can be liable to the buyer under the following circumstances. These are essentially a retrospective adjustment to the price.
- Fundamental matters such as not owning the shares sold.
- Fraud or deliberately concealing matters from the buyer.
- For pre-agreed matters which are known at Completion but arise after Completion (Indemnities). These are matters which, had they occurred prior to Completion, would have led to a pound-for-pound upfront adjustment of price.
- For statements that the buyer asks of the seller in relation to the business which later turn out to be inaccurate (warranties) and were not qualified prior to Completion (disclosure).
Limitations on liability
Limitations on liability provisions are negotiated so that the seller can have a clean break after Completion. There are generally no limitations in respect of fundamental matters or fraud/wilful concealment.
As matters giving rise to indemnities would have led to a pound-for-pound adjustment to price before Completion there is no logical reason to limit them after Completion. However, as they are known they are normally capable of being given a timescale and a quantum so limitations based on those parameters can be negotiated.
Warranties are normally subject to time limits of between 12-36 months (to enable the buyer to get under the bonnet of the business) and monetary hurdles and limits. The monetary hurdles are designed to avoid minor claims being claimed for and to provide an overall upper cap on the liability of the seller. The starting point for that negotiation is normally the whole price.
This final phase of the transaction is often long and intensive. It can surprise a seller who believed that the deal was done at Heads. It requires time and attention to protect the price and the seller will, at the same time need to continue to run the business. This execution phase is a second job and should be treated as such.
With the right preparation and the right team, a seller is put in an excellent position to manage the transaction and not be carried along by the buyer on the buyer’s terms. It also mitigates the chances of the transaction ending in an abort. Getting sale-ready is by far the most valuable thing a seller can do to achieve a successful Completion.
We hope that you have found each part of this guide helpful. We have sought to provide an insight into what the sale of a business involves and how best to navigate the process from start to Completion.
If you are thinking about selling your business or have questions for our corporate team about the process, please contact our Stoke-on-Trent solicitors on 01782 205000, our Altrincham solicitors on 0161 9298494 or our Birmingham solicitors on 0121 516 3025.