EveryMonth (June 2010): Selling Private Companies – The Legal Process

Buying a private company can seem deceptively simple: you can do it by completing a single-page form! But don’t be seduced by the idea of that ‘simple’ one-page form: because of the potential liabilities, private companies are rarely bought and sold on the basis of this alone. One of the first things to consider if you are thinking about acquiring a company is ‘due diligence’: investigating the affairs of the company to better understand what you might be buying.

The legal process

Before a seller tells you anything he wants to know the likely price and whether you can pay it. You, on the other hand, need information, so you can get external finance (if you need it) and make a sensible offer. So the starting point is often to sign a confidentiality agreement.

Once you have enough information, you can agree a firm price for the company, subject to due diligence. At this point, it’s good practice to draw up a ‘term sheet‘ or ‘heads of agreement‘ recording the main points of the deal. You don’t have to do this, but we believe it’s an essential step – the biggest risk in many transactions is the damage to the company from a badly managed sales process.

On large transactions you may ask for a binding commitment (a ‘lock-out’) from the seller to negotiate only with you for a set period, often backed up by an agreement to pay your costs if he breaches the arrangement. This is less of an issue on smaller transactions, partly because most owner managers don’t have time to negotiate with more than one potential buyer while also trying to keep their business running!

So what is due diligence?

Typically, the buyer sends the seller a list of questions about the company, together with requests for various documents. For larger acquisitions you may even send in your own team of advisers to conduct investigations, while on smaller deals you will probably choose to review the due diligence information yourself with support from your advisers.

The length of due diligence depends on the size and complexity of the company: a consultancy business operating from small rented premises will need less investigation than a multi-site manufacturing company with a significant workforce.

Legal documentation

After signing the term sheet or heads of agreement, and while due diligence continues, the parties start negotiating the share purchase agreement (SPA), which sets out the terms on which the company is sold. Normally prepared by the buyer’s solicitors and negotiated at length, a comprehensive SPA can run to over 100 pages.

The SPA firstly sets out the mechanics of the sale, and secondly protects you from possible problems with the company, through the use of legally binding warranties – statements of fact about the company given by the seller.

Negotiating the warranties involves agreeing limits on the seller’s liability to pay for breaches of warranty, and a time limit for you to bring any claims. The seller will also protect himself by setting out any exceptions to the warranties in a document known as a disclosure letter.

With the SPA agreed and the loose ends tied up, you can complete the deal. As well as the SPA and disclosure letter, there will be board minutes of the relevant companies, resignations of directors, company secretaries and auditors, and forms to change the company’s registered office and accounts date. Finally, the stock transfer form ultimately transfers the shares to you.

After the ink has dried…

After the legal process has completed you still need an efficient handover of the business, possibly even involving the seller acting as a consultant for a period of time. In this article we have only considered the legal process, but the sale of an owner-managed company can be very challenging, raising sensitive personal and business issues. This makes it all the more important that you choose legal advisers who are sensitive to personal and business as well as legal issues.

If you’d like further information please contact us by phone on 0845 868 0962, or by email: We’ll be very happy to set you on the right path.