Purchase and Sale of Business
The purchase or sale of a business is likely to be one of the most complex transactions which the shareholders in a company, or owners of an unincorporated business, are likely to be involved in. The level of complexity will vary from one business to another, and no two transactions will ever be identical.
There are two critical things which have to be determined at the outset. Firstly, what form the transaction will take. In the case of unincorporated businesses, a sale of assets and goodwill will occur. In the case of a company however, the starting point is that a sale share may be preferable whereby the company doesn’t outwardly change, but the control of the company does. However, in certain circumstances such as where only part of a company’s business is being sold, or where the company has something within its history which is viewed as detrimental to a purchaser, the sale of assets and goodwill may be best as, in the latter case, for example, the buyer can avoid any residual liability caused by whatever problems have gone before.
The second issue to understand is why the business is being sold. In certain cases it may be financial, such as an offer from a competitor which is too attractive to refuse or where circumstances mean a sale is a necessity, such as imminent insolvency or a change in personal circumstances. In many cases however, a transaction will be dictated by the wish for the present shareholders or owners to retire, whilst guaranteeing the future of the business and ensuring continuity for staff and customers alike.
We have recently concluded one such matter where the wish to retire was the primary reason for sale. The business was a specialist fabricators, which had been established in the early 1990s but which had expanded to cover numerous sites, admittedly in close proximity to one another, in recent years.
We were instructed by the Purchasers, whose position was a little unusual. They had worked in the industry for many years themselves and had sold their own business interests some years earlier. Having had some time off whilst they worked through periods covered by restrictive covenants, and being too young to retire themselves, they had been introduced to the present owners and prior to our involvement, had gradually started to integrate themselves into the business in the role of consultants. Indeed, by the time the sale completed, our clients had been working in the company for a couple of years.
There were several unusual aspects to this transaction. Although our clients had perhaps more knowledge of the business than others, there was still a lot that they did not know or were not aware of. A full due diligence exercise therefore had to be conducted so that our clients fully understood what they were taking on. This included having to gain an understanding of some substantial contracts which the Company had fortunately won in recent years, as well as some less usual circumstances. The nature of the work undertaken had resulted in a number of noise and environmental notices being issued, and our clients had to be satisfied that there was no residual liability arising from these. We also had to gain an understanding of recent changes which had resulted in certain types of steel primer commonly used by the company, no longer being subject to harmful substance regulations.
However what was very unusual, was that whilst the Sellers had earmarked our clients as their key predecessors, they were only prepared to sell 84% of the shares in the company. The balance of 16% of the shares was allocated to a number of long serving employees to reflect their long service and contribution to the previous success of the company. This caused us some significant challenges as what was a very generous arrangement had to be documented in such a way as to ensure that the spirit of what the Sellers wanted to achieve was maintained, whilst at the same time, making sure that our clients were not overly disadvantaged given their substantial financial commitment in purchasing the majority of the shares. The resulting Share Purchase Agreement (the contract for the deal) was extremely complicated.
Likewise, the financing of this deal was complicated and was why the Buyers had the extended period working in the business, before the deal could be documented. Rather than obtain commercial finance which whilst available, may not have enabled the deal to be fully funded, the Sellers agreed to defer payments of the purchase price for an extended period. As a result, very complex loan documents had to be produced and we had to advise our clients on multiple levels of security which the Sellers understandably insisted upon as part of the deal.
The key to successfully concluding this transaction was to ensure, by negotiation and proper documentation, that the competing interests of the Sellers, the existing staff and the Purchasers were as closely aligned and protected as they could be. Although very complicated, the transaction was concluded in a very friendly atmosphere and the company continues to thrive today, a year or so after this deal was live.
At Bennett Griffin, the Company Corporate team are entirely flexible and are able to deal with the most unusual or diverse circumstances that a business sale or acquisition may throw up. If you are considering selling, or purchasing a business, the key to a successful transaction is really in the planning and detail and our Company Corporate team would be delighted to speak with you at an early stage.