Succession Planning Andrew Kerr
Legal & Commercial Process Getting the business ready for sale before the search for a buyer begins Identify who could be a potential buyer Establish the Heads of Terms Legal & Financial Due Diligence Acquisition agreement & disclosures Completion
Getting the Business Ready for Sale How good is your legal paperwork eg. terms & conditions, employment contracts, customer & supplier contracts, property leases, data protection, health & safety compliance, regulatory approvals, litigation, employment disputes, internal shareholder disputes, to name a few! Sort out the issues / get the paperwork in good order, before you go to market That will make the legal process quicker and therefore cheaper And will not give the buyer reasons or excuses to reduce the initial offer price, or to reduce the offer price during the due diligence process Mend your roof and fix your boiler before selling your house, same principles apply!
Share Sale Explanation Company is sold Lock, Stock & Barrel, inclusive of assets, liabilities, employees, contracts, property etc This option is potentially the most simple from a transactional point of view Broadly two methods exist - a newly formed company can be used to purchase the shares - or could purchase personally On a basic level, a share transfer form is completed and shares are transferred to new owner(s) Areas of potential complexity: - All parties may not want to exit at the same time, this could be caused by age, value or taxation issues - The valuations of each share group may vary depending upon the size of the shareholding which may effect their desire to sell
Share Sale Legal Perspective Due Diligence Extent of due diligence Legal due diligence Due diligence findings
Share Sale Legal Perspective Transaction Documents Share Purchase Agreement Disclosure Letter Tax Covenant Ancillary Documents TUPE does not apply to share sales
Share Sales Pros & Cons Pros Cleaner and easier to deal with Cons Buying all liabilities, both known and unknown No TUPE to consider Stamp Duty is payable (0.5%) Less third parties to deal with, as they still contract with the same party The seller has a clean transaction with less complexity The personal and Corporate tax position is cleaner Harder and more costly from a Legal point of view due to greater due diligence Not all shareholders may want to sell Tax issues the balance sheet consist of non trade assets
Asset Sale Explanation The buyer cherry picks assets and liabilities to purchase: This allows the buyer to leave behind assets or liabilities they don t want The selling entity retains any hidden or visible liabilities or problems This allows a selling company to sell off part of a trade or asset and continue to trade unaffected A new company is often created with new owner(s) as shareholders to purchase assets Any amount paid above value of separable net assets is goodwill Goodwill is shown on the face of New Co s balance sheet and amortised over its useful life. Somewhere around 5 years. There is usually a lot of admin areas to cover Company formation Bank account set up Statutory admin: PAYE references; Vat references
Asset Sale Legal Perspective Due diligence The information gathering process Due diligence findings Timing and approvals Transaction Documents Asset Purchase Agreement Disclosure Letter Ancillary Documents
Transfer of Undertakings (Protection of Employment) Regulations Applies to asset sales only Employees are automatically transferred to the buyer All pre-transfer liabilities are acquired by the buyer Obligation by the seller and the buyer to inform and consult employees
Asset Sale Pros & Cons Pros Specify which assets you are purchasing Buyer can get around minority shareholder not willing to sell Certain lengthy legal processes can be avoided if the assets being acquired do not require specific transfers such as lease assignments, hire purchase contracts and trade registrations Cons SDLT rates higher than stamp duty where assets include land or buildings (range from 2%, 5%, 10% and 12%) Re-titling assets in the name buyer/novation of contracts, not required with a share purchase Often have to deal with a close down of the company
Asset Sale Pros & Cons Pros Due diligence more straightforward (and therefore cheaper) Fewer warranties and indemnities required by the buyer Cons Double taxation charge on sale and extraction If the assets being acquired are financed or are owned by a third party the legal process is more complex issues of consent arise TUPE /Redundancy costs usually apply Third party consent (Landlord, customers, suppliers, equipment leases etc.) required for contract assignments.
Company Purchase of Own Shares - Explanation Company buys shares from current shareholders, 3 options Substantial amounts of cash needed on balance sheet to complete the transaction Sufficient retained reserves/accumulated profits required Increases percentage ownership of remaining shareholders
Company Purchase of Own Shares - Explanation CPOS is often linked to new share issue which allows the introduction of an MBO team or financier. If the exiting owners are in dispute or have different goals (retirement time, change in direction etc.) then CPOS works well as one party can exit while the business continues Would require a formal valuation and HMRC agreement and strict capital/creditors protection which is laid down in the Companies Act
Company Purchase of Own Shares Pros If retained reserves and cash are available it is a very straight-forward transaction Pros & Cons No third party or TUPE issues to worry about No lengthy due diligence process Simpler legal agreement required therefore more straightforward (and cheaper) Cons Stamp duty is payable (0.5%) Becomes difficult to negotiate if reason for CPOS dispute