Buying and selling a company

Buying the company or buying the business

These are two different deals and the choice is not a matter of style. Buying the shares means buying the whole company: its contracts, its employees, its licences and also its debts, including the ones that have not surfaced yet. Buying the business unit means choosing what you want and leaving the rest behind, but contracts have to be renegotiated, consents obtained, and employment, and where applicable tax, succession assumed.

The decision turns on how much hidden liability you are willing to take on and on the tax cost of each route. It is taken at the start, not halfway through.

The letter of intent weighs more than it looks

It is signed early, while the mood is still good, and although most of it is non-binding, three things are not: exclusivity, confidentiality and who bears the costs if the deal collapses. It also sets the mental frame of the negotiation. What is conceded there is very hard to recover later.

Legal due diligence

Due diligence is not a filing exercise: it is the stage at which the real price is decided. It covers title to the shares and any charges over them, contracts with change of control clauses, the employment position, open and foreseeable litigation, industrial and intellectual property, licences and permits, and data protection compliance. Every finding has three possible outcomes: reduce the price, cover it with a specific indemnity, or make closing conditional on it being resolved.

Representations and warranties

This is the heart of the contract. The seller states things about the company and answers if they turn out to be untrue. What gets negotiated is not the list, which is fairly standard, but the limits: how long liability lasts, up to what amount, above what minimum a claim can be brought, and what is carved out as already disclosed. That is where the agreed price is won or lost.

Price: locked box or completion accounts

With a locked box, the price is fixed on an earlier balance sheet and the buyer takes the business from that date, with a ban on extracting value in the meantime. With completion accounts, it is adjusted afterwards against the real position on the day of signing. The first gives certainty; the second, precision. It is also worth deciding whether part of the price is held back as security and whether there is variable consideration tied to future results, which is the formula that generates the most litigation and demands the most care in drafting.

From agreement to closing

Between signing and closing there are usually conditions to satisfy: authorisations, third-party consents, the release of security or of personal guarantees, which almost always turn up and are almost always forgotten. It is also worth settling the seller's non-compete, with a reasonable scope and duration, and documenting a mutual waiver of claims so the matter does not come back in three years.