How to successfully exit a business – Part 2
Here, in our second blog post regarding a GC Know How session on successful business exits, we note further key highlights – focusing on the due diligence process and the deal cycle more generally, essential legal documents, and the necessary steps for completion.
If you haven’t read Part 1, you can find the first installment on planning for a successful business exit here.
Below, Helen Gerrard and Alex McPherson discuss more legal considerations when preparing for an exit.
Sell-side due diligence
In the context of due diligence, the focus is often on the target company. However, it can also be essential for a seller to carry out due diligence into the buyer. This need not necessarily be extensive, but at the very least, the seller should try to ascertain how serious the buyer is, before investing significant time and money (including the cost of legal fees!) in progressing through a sale process – and potentially disclosing sensitive commercial information – only to have it all fall through for no good reason.
Getting to know the buyer can also be key if the consideration might include an earnout provision or shares in the buyer, and/or if the sellers want to ensure that the business will continue to flourish once ownership changes hand.
The deal cycle
Deal cycles will vary depending on the nature of the transaction. However, in general, deals will involve the following stages and documents.
Preliminary stage
This usually involves the parties signing a confidentiality agreement, possibly an exclusivity agreement, and agreeing “heads of terms”. The heads of terms is usually non-binding, but will form the basis of the key legal documents drafted further down the line.
Due Diligence
The parties will then usually kick off their due diligence, with the seller setting up a data room and uploading hundreds (if not thousands) of key documents relating to the target. On that note, it’s important that a data room is effectively organised and populated, as this can be key to evidencing that documents were properly disclosed (as can a comprehensive disclosure letter).
As part of its due diligence into a target, a buyer will want to look at the company’s ownership structure, financing arrangements and accounts, employment contracts, key commercial contracts (e.g. customer, supplier and other stakeholder agreements), intellectual property, and so on. Sellers must ensure however that they aren’t inadvertently breaching confidentiality obligations to third parties by disclosing certain documents.
Note that if the target is being sold via an auction process, the seller might produce a due diligence report on the target and provide this to prospective acquirers (rather than each acquirer carrying out its own due diligence from scratch).
Drafting and negotiating documents
Whilst the due diligence process is running, the parties will start working on the key transaction documents, the most important of which is the SPA. The buyer often produces the first draft, although a seller will do so in the context of an auction process. SPAs contain terms such as the price, what’s included, sale conditions, pre-completion obligations, completion mechanics, termination, warranties, limitations on liability, and restrictive covenants.
The deal might also involve drafting or amending a range of documents, including:
•
Transitional services agreements (if the buyer requires the seller to facilitate a smooth transition as the business changes hands).
•
Options agreements (if key employees have been granted options).
•
Employment and consultancy agreements (e.g. to bring existing terms in line with terms offered more generally across the buyer’s business).
•
Assignments of intellectual property (e.g. if the target doesn’t own the IP on which it relies).
•
Commercial agreements (e.g. if they contain provisions entitling the counterparty to terminate if ownership of the target changes hands).
•
Indemnities for lost share certificates (if any cannot be located).
At this stage, tax advisers would also usually be brought in to check that the provisions are tax compliant and efficient.
Signing and completion
Signing and completion might take place instantaneously, or completion might take place at a later stage if (for example) certain conditions need to be fulfilled before the deal can fully close. There are then various steps that might need to be taken post-completion, including making certain filings, executing board resolutions, updating share registers and company books, paying stamp duty (once HMRC returns the stamped stock transfer form), and so on.
Alex McPherson
Founding Partner Alex McPherson graduated from Oxford University in 2003, and gained many years of broad legal experience at leading law firms Freshfields Bruckhaus Deringer and Hogan Lovells, including client secondments at Tesco, ExxonMobil and Goldman Sachs.
He set up Ignition Law in 2015, now a high-growth full-service law firm, which has worked with many thousands of start-ups, scale-ups and entrepreneurial clients, to provide pragmatic and cost-effective legal services in a community-minded and ethical way.
Helen Gerrard
Partner Helen Gerrard has many years’ experience working on corporate and finance transactions and restructurings.
Prior to joining Ignition in 2016, Helen worked at Magic Circle firm Freshfields Bruckhaus Deringer for many years – in both London and New York – as well as at O’Melveny & Myers LLP in New York and Linklaters in London. She has also undertaken secondments to Goldman Sachs, Alcentra, Barings, Barclays Bank PLC and The Bank of Tokyo-Mitsubishi Ltd.
Helen acts for both borrowers and lenders in various industries, advising on all aspects of corporate lending and restructuring. Her extensive experience includes syndicated and bilateral facilities, real estate and acquisition finance and shareholder/director funding, as well as many large scale restructurings (acting for companies in distress or advising the coordinating committee of lenders).
If you would like help preparing for or executing a sale or acquisition, or any other corporate or finance-related matters, please contact Helen Gerrard or Alex McPherson. If you would like to attend one of our future sessions, please contact Tammy@ignition.law.
If you missed the session or want to revisit the information, a full recording is available. Please sign up below for access to this and our other GC Know How session recordings.
