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Acquisitions come in all shapes and sizes. How you choose to structure an acquisition can be driven by a variety of factors. Whichever route you choose to go down, there will be a number of considerations both legal and otherwise.
Here, Matthew Sutton, Corporate Director at Greenaway Scott offers his expert advice on what to expect when acquiring a business.
Asset or Share Purchase?
The main consideration for anyone looking at acquiring a business will be whether the acquisition will be by way of share purchase or asset purchase.
On a share purchase the buyer acquires the target company with all its assets, employees and the benefit of contracts, but also any liabilities and obligations. When you acquire the shares of a company you essentially ‘step into the shoes' of that company. Often customers and suppliers will be happy to continue dealing with the company as it did before although third party consent to a change of control is often required in relation to certain contracts.
On an asset purchase, you select which assets and liabilities you wish to acquire. There is an exception to this rule in relation to employees, as asset purchases are often subject to the TUPE 2006. In such cases, a buyer will acquire all of the employees employed in the business at the time of the transfer, together with any rights and liabilities relating to them.
Which route is right for you?
Generally speaking, buyers usually favour an asset purchase as it allows for the ‘cherry picking' of assets and liabilities. However, there is an argument that an asset purchase can be more disruptive to a business as you may need to re-build confidence with certain customers and suppliers in order to maintain good ongoing trading relationships.
There are a number of preliminary agreements which can be entered in the negotiation stage of a deal.
Heads of Terms
Heads of terms outline the main terms on which a seller agrees to sell, and a buyer agrees to buy a business. Heads of terms evidence serious intent and have moral force, but are not usually legally binding.
Exclusivity agreements allow a buyer the right to negotiate exclusively for a period of time. Typically, a seller will agree to terminate any current talks with third parties, not to solicit any further offers and not to provide any information to any third parties.
Non-disclosure agreements are used as a means of ensuring that confidential information is not disclosed beyond those who need to know the information. From a seller’s perspective, it is important that the buyer maintains confidentiality in relation to the information that the they provide about their business. The seller will also be keen to ensure that the buyers do not try and “poach” any employees, suppliers or customer.
The Due Diligence Exercise
On any acquisition, a prospective buyer will want to be sure that the seller and (in the case of a share purchase) the target company, have good title to the assets being bought and know the full extent of any liabilities it will assume.
For acquisitions subject to English law, the principle of caveat emptor, or buyer beware, will apply. It is therefore essential that the buyer carries out its own investigation of the target business at the negotiating stage through a due diligence (DD) exercise.
The information obtained during the DD process will help the buyer evaluate the strengths and weaknesses of the business, establish the right price, identify liabilities or risk areas which may impact on deal-structuring and identify any third party consents or approvals which may be required.
Once the due diligence exercise has been completed, the buyer is usually in a better position to assess the risks and rewards of the purchase and can seek to renegotiate the terms of the purchase agreement if appropriate.