At the heart of any sale there are a core set of documents designed to protect the interests of either the buyer or the seller. It is essential that both parties seek legal advice to ensure that these documents do not incorporate hidden surprises and work to the advantage of everyone involved.
- Heads of terms
After agreeing in principle to a sale the key terms are often set out in a document known as ‘heads of terms’. Heads of terms are not usually legally binding and are more often a statement of intent between the buyer and seller.
However, there are circumstance were the terms can be expressed in a manner which will later compel the parties to comply with what has been agreed. It is therefore vital that a solicitor review or prepare the first draft of the heads of terms so as to avoid any unintended consequences.
- Confidentiality & Exclusivity Agreements
During the course of the sales process the buyer will require access to a great deal of information concerning the seller’s business. It is an unfortunate reality that not all sales are successful and a danger exists that the buyer may subsequently disclose vital information to a competitor. It is a sensible idea to draft an agreement which prevents the prospective buyer from disclosing any confidential information to another party.For their part, a prudent buyer may insist that a period of exclusivity be agreed to complete the purchase. It is important that this is reviewed to ensure that the duration of exclusivity is no longer than necessary to complete the deal and that the seller is free to deal with other parties if the sale breaks down.
- Due diligence information request
After agreeing heads of terms, the buyer will start its due diligence. This is a process in which the buyer will request a great deal of information concerning the internal processes and performance of the business to ensure that the agreed price is a fair reflection of the company’s value.This is often a very time consuming process and is full of complexity for which the expertise of a legal team and a set of accountants may be required. Often a buyer will prepare an information request asking for precise details on areas of specific concern. Any response must be carefully considered because ultimately it may affect the sales price or lead to the seller incurring inadvertent liabilities after completion.
- Purchase agreement
The buyer’s solicitor generally produces the first draft of the purchase agreement. This will of course be drafted to protect the interests of the buyer and must be carefully reviewed by the seller’s solicitor to ensure that its interests are sufficiently protected.
The purchase agreement will include a large number of ‘warranties’ and ‘indemnities’ which may be used to recover contingent losses from the seller after the deal has been completed. It is important that a limit be placed on any such future liabilities and for their scope to be narrowed as far as is acceptable.The buyer will also want to protect its future interest in the business and will place restrictions on what the seller may do after completion. These usually consist of clauses which prevent the solicitation of customers, poaching of employees and an agreement not to compete with the business. It is important to ensure that any such restrictions are reasonable and will not unnecessarily prevent the seller from earning a living.
- Disclosure Letter
The seller’s solicitor will draft a disclosure letter which is an essential element because it qualifies the warranties provided in the purchase agreement. The reason for doing so is to ensure that the buyer is unable to successfully sue the seller in relation those issues which are revealed by the letter. The seller’s solicitor will discuss the letter at any early stage with the seller to reveal any specific issues. It is imperative that this is a comprehensive exercise and that the seller is pro-active in compiling the necessary documents and disclosures.