A business can be sold by selling the shares or selling the assets. When the assets are being sold, rather than the shares, it is important for the buyer to ensure they know as much as they can about the assets they are buying and making sure they do not acquire any unexpected liabilities of the business. Once the structure has been agreed and the key terms negotiated it is time to finalise the legal documentation.
From a buyer’s point of view, it is often best to simply buy the assets of another company as this allows the Buyer to ‘cherry pick’ the assets they want and leave behind those they do not require. The Seller will normally try to structure the sale as a share sale as they mean the seller disposes of their business ‘lock, stock and barrel’. The Buyer may also prefer a share purchase but this is normally when the selling Company holds key contracts or accreditations in the name of the Company.
Once general foundations for a deal have been agreed, the parties will move towards drawing up heads of terms to document the terms on which they are willing to proceed.
When should Heads of Terms be used?
Head of Terms are not a substitute for the detailed contract and will not be binding unless stated to be so. Heads of Terms should always be ‘subject to contract’ and when acting for the buyer, ‘subject to due diligence’. It may be that some cost is incurred in agreeing the heads of terms but this exercise could pay its reward in the long run as without a clear indication of the agreement, it will be an open playing field when drafting the substantive clauses of the purchase agreement.
Heads of Terms will usually include:
- Whether a deposit is payable
- The purchase price
- The terms of when and how payment will be made
- Whether the transaction is a sale of assets or a sale of shares
- What is included in the sale and anything that is specifically excluded
- confidentiality provisions
- Exclusivity provisions
- Key Warranties and indemnities
- Details of the premises – freehold or leasehold
- Details of any major equipment leases
- Details of any key employees or key intellectual property rights
- A timetable for the deal
You may also be advised to include a duty of confidentiality in the Heads of Agreement (even if a separate NDA has already been signed) including not to use the information contained in the Heads for any other purpose apart from that intended.
Although much of the discussion between the buyer and seller is a matter of business negotiation it is an advantage for professional advisers to help structure the heads of terms from the outset. A sale or purchase of a business may seem like a rare occurrence in business life but not for good commercial solicitors. As a seller, you only get one chance to sell your business and as a buyer, a purchase rushed through without adequate investigation could be the last.
AMD are experienced commercial solicitors in Bristol. For more information on how we can help, call us today on 0117 962 1205.