Selling your Business in the UK – Practical and Legal Considerations
Our corporate lawyers deal with numerous business sales each year, of many different business types, from various industry sectors and sizes.
Based on our experience, the following are key issues for owners considering selling their business.
Asset sale or Share sale?
There are 2 main transaction structures when selling a business, which are:
a share sale (where the Buyer acquires the entire entity, containing all the assets and liabilities); and
an asset/business sale (where the buyer acquires specific assets from the business, and assumes agreed liabilities).
Generally speaking, buyers may prefer to ‘cherry pick’ the parts of the business they wish to acquire so as not to take on liabilities and to buy via an asset purchase whereas most sellers would opt to sell the entire company as a ‘clean break’ from the company and its liabilities and the tax treatment of each is very different.
Owners that are involved in the day to day operation of the business may be required to stay on for a period post completion to assist with the transition and keep long standing customers and suppliers on side.
With share sales, it is common for buyers to try and negotiate an earn out, i.e. proportion of the price paid over time after completion of the sale so that the full purchase price is not payable on completion. This can depend upon certain agreed future events and reaching financial targets.
It is important to note that the seller is different under each type of transaction. In an asset/business sale, the company itself is selling the assets/business to the buyer, whereas in a share sale the shareholders of the company are the sellers.
Axiom DWFM can advise on the best transaction structure, taking into account your objectives and how best to protect your position.
Due diligence is a crucial stage for both asset/business and share sales. Buyers will require information about the business affairs to identify risks, minimise liabilities post-completion and potentially negotiate a reduction in the purchase price. It generally falls into three categories.
Financial: a full evaluation of the company’s financial affairs including CGT, PAYE, VAT, property taxes and borrowings/liabilities both on and off balance sheet.
Physical: surveys of properties, operating equipment and IP rights.
Legal: analysis of all of the company’s existing legal documents and processes which can include data protection, health and safety, etc. Overseas investors who have not operated in the UK before can be unaware of the procedures that are required and we aim to give appropriate guidance where it is needed.
Due diligence findings will then often lead to certain warranties and indemnities being negotiated into the transaction documents. It may also cause the buyer to look at what security exists to support the warranties and indemnities and whether anything additional may be required should the seller be based outside the UK or have few or no assets in the UK.
At Axiom DWFM we have the resources to collate due diligence documents, provide virtual data rooms, review the replies and documentation and assist with responses to legal due diligence enquiries.
The Legal Documents and stages in a business sale
Sellers will need to provide comprehensive documentation and information through their management team and expect the following to be part of the process.
Heads of Terms
Heads of terms are not always drafted and are not strictly necessary but can be useful as an initial document setting out the key terms of the transaction. Heads of terms are part of the early stages of a negotiation to help facilitate and clarify discussions.
Binding aspects of Heads of Terms
Heads of terms, generally, will not be contractually binding but certain provisions within Heads of terms may be expressly stated as legally binding and actionable. The most common examples are confidentiality obligations a seller should insist on from the buyer before due diligence takes place and business critical information is made available to the buyer. If the seller and buyer agree a period of exclusivity for the buyer, this may also be given legally binding status.
The parties may decide to enter into a separate confidentiality and/or exclusivity agreement.
Where heads of terms are agreed, if either party subsequently seeks to change material aspects, this can lead to an early and sometimes complete breakdown of trust and the transaction may become abortive.
Share Purchase Agreement or Asset Purchase Agreement
This is the main document and contains detailed terms of the sale and purchase often running to 90+ pages. Main terms usually include:
purchase price mechanisms and payment terms;
the assets to be transferred to the buyer (on an asset sale);
warranties and indemnities;
limitation of liability on warranty and indemnity claims;
post-completion restrictions; and/or
specific provisions in relation to property, employment and pensions and intellectual property (where applicable to the business)
The disclosure letter is a document that carefully lists in detail those matters that it is agreed are deemed to be accepted and not actionable by the buyer. To be effective disclosure has to be “full and fair”. It is prepared on behalf of the seller/s and addressed to the buyer/s containing both general and specific disclosures and accompanied by an electronic disclosure bundle, to qualify any of the warranties given in the sale and purchase agreement.
Warranties and Indemnities
Where shares or business assets are being sold, there is no automatic protection for the buyer. The buyer will therefore seek contractual protections in the sale and purchase agreement, such as an extensive list of warranties and in some case indemnities. Warranties and indemnities are often the most contentious part of the final negotiations once the basic sale terms are agreed and lawyers instructed.
Warranties and indemnities form a crucial part of the sale and purchase agreement. A warranty is a statement of fact about a particular aspect of the business and can lead to a claim for damages whereas an indemnity is a promise to reimburse the Buyer in respect of loss suffered.
In a share purchase, the proceeds of the sale are paid directly to the company’s shareholders, who may be liable to pay tax on the proceeds but may be eligible for Business Asset Disposal Relief (formally Entrepreneurs’ Relief), which reduces capital gains tax relief to 10% on disposals of qualifying business assets, subject to a lifetime limit of £1 million. Overseas investors to the UK may hold their shares in UK companies through offshore companies or trusts and appropriate tax advice should be obtained before agreeing terms of sale or embarking on the sale process. At Axiom DWFM we do not give tax advice but do work with both national and international tax advisers to ensure our clients receive the right advice in each sector.
In an asset purchase the selling company is taxed on the consideration paid by the buyer. The company will be liable to pay Corporation Tax on the profit made from the sale and Capital Gains Tax on cash withdrawn as a dividend. The overall tax cost of an asset sale is therefore likely to be higher than for a share sale.
Also known as a tax covenant, a tax indemnity will almost always form part of a share purchase agreement. The tax covenant is a promise by the seller to pay to the buyer the amount of any tax liability of the company incurred before the sale.
As a result, specialist tax advice should always be sought in these types of transactions.
Depending on the type of transaction structure, certain regulations in relation to the transfer of employees must be followed.
In an asset/business sale, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) is likely to apply to employees. TUPE aims to protect employees’ current terms of employment when a business is transferred to a new employer (the Buyer). A seller may have specific obligations to inform/consult with employees about their plans prior to the completion of the sale. Provisions protecting employees in the UK are very different to those in other jurisdictions and the Axiom DWFM employment team are available to give advice at the early stages of any transaction to ensure the position is fully understood before terms are agreed.
By contrast, a share sale would not involve a change of employer (which remains to be the company acquired by the buyer) and TUPE therefore does not apply.
Axiom DWFM can provide specialist employment and pensions advice to you to ensure you fulfil your obligations under employment law.