Mergers and acquisitions

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Mergers and Acquisitions

Sometimes called “mergers and acquisitions”

buying and selling companies tend to come at very different points in your working life and can happen in equally different ways. Your accountant may have advised you up to the point that you need a solicitor or you may have had a conversation with a few friends and spotted an opportunity.

Depending on the size of the business, you may also need to be thinking about property and staff – possibly in ways that you hadn’t even considered because you just want to get on with it.

How does it work?

Transferring a business can happen in a couple of different ways: sale of assets or sale of shares.

Assets: whether the business is a limited company or sole trader, the sale of assets essentially strips out the stuff that the buyer requires to carry on the business. This will normally consist of stock, equipment, goodwill such as client contracts, supplier contracts, premises, staff, intellectual property such as the name and logo and so on. It can also the buyer to leave behind the problematic bits such as debts and penalties.

Shares: this allows a buyer to literally step into the shoes of the people who previously owned the company, warts and all. A buyer will normally want to acquire 100% of the company and will need to carry out enough due diligence to ensure he or she is not going to discover skeletons in the closet later on!

 

At the early or development stages of a business, you might be looking to take on investment and this is likely to involve either a loan to the company or the passing of shares to those investors. Both require careful thought, with entrepreneurs often believing that shifting a few of their own shares being a safe option. I would say that this requires careful planning if not to end in tears in a few years, in the absence of different sorts of shares, proper planning and written agreements, investors can begin to feel like millstones fairly quickly, particularly those who want to exert control.

On the other hand, canny investors who are being relied upon for their expertise can be recompensed and worked with to enable rapid growth. Again, though, get it in writing!

We also help business owners think about succession planning which allows for the business to think about the owners’ retirement, passing the business on to the next generation or whatever the current owners want to achieve ‘at the other end’. It’s vital for business owners to consider what might happen in a worst-case scenario so that their private plans form a seamless solution with their business objectives and provide their families without conflict: for example, shares need to go in the right direction and not be caught up on absent or badly drafted shareholders agreements, wills or intestacy.

Some owners may want to pass the business on to their management team, often bit by bit. This is known as a management buy out or “MBO” and proper planning allows the expertise and loyalty of the management team to be rewarded while protecting the hard work put in by the founders.

Whatever you’re looking to achieve, we will work closely with you and your accountant to ensure that all the angles have been looked at and you’re free to focus on what’s important.

A few basics…

Due diligence: this is the process whereby a buyer will ask a series of questions, receive information and documents and inspect these and assess the true health of the business being acquired. Just like buying a house and the pre-contract enquiries, this will run through all the potential problem areas so that the buyer is fully aware of all the issues.

Warranties: the due diligence process feeds into this because warranties are essentially promises about various elements of the business from proper record keeping to issue-free accounts, tax and employment of staff. Warranties are promises, they form an essential part of the sale contract (whether it’s an asset purchase or share purchase agreement) and if they are not accurate and true, this will be a breach of contract so it’s really important to get these right. Sellers need to think about their liability here in that a share sale will tend to be personal, the seller personally owns the shares and is making promises about the company the shares are in so a breach of warranty will be visited upon him or her personally. If a company is selling assets and there will be nothing left after, the buyer might ask the owners to personally guarantee the selling company’s obligations here. If the business is a sole trader, then the liability will be personal.

Disclosure: this is the other side of the warranty coin, where the seller is putting all the issues about each warranty sought by the buyer on a plate. This gives the seller an opportunity to qualify and water down the impact of the warranties. For example:

Insurance warranty: seller promises that all insurance premiums have been paid, there are no circumstances that could void an insurance policy and no claims have been made.

Seller’s disclosure: I did notify the insurance company that we had a customer complaint last September, but it didn’t come to anything.

If in doubt, disclose it! Your legal adviser can help here.

 

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