The sale and purchase of a business is a major transaction that requires careful planning and expert legal advice. At the heart of any business sale is the business sale agreement – a legally binding contract that sets out the terms and conditions for the transfer of a business from a seller to a buyer.
This comprehensive guide examines business sale agreements in depth, providing key information for both buyers and sellers of UK businesses.
What is a Business Sale Agreement?
A business sale agreement, also known as an asset purchase agreement, is the primary legal document that governs the sale of a business. It details exactly what assets and liabilities are included in the sale, the responsibilities of both buyer and seller, and the purchase price and payment terms.
Business sale agreements are commonly used for asset sales, where the business assets are sold but not shares in the company. They should not be confused with share purchase agreements, which are used when a buyer acquires shares in the company that owns the business.
When to Use a Business Sale Agreement
A business sale agreement is appropriate in many common scenarios, including:
- The partial sale of a business: If only a portion of a business is being sold, such as a product line, division, or selection of assets, a business sale agreement covers the transaction.
- Business mergers & acquisitions: Asset sales are commonly used during mergers and acquisitions as an alternative to share purchases. In these transactions, it is important that company directors fulfil their legal responsibilities by ensuring due diligence is properly conducted and that the sale serves the company’s best interests.
- Startups acquiring assets: New businesses often purchase assets from existing companies during the start-up phase rather than building from scratch; it is a cheaper way to acquire things like machinery.
- Divestment of assets: Selling off non-core business assets and divisions.
- Debt reduction: a business may decide to sell off some of its assets to reduce its debt burden. A business sale agreement would act as a record of the asset sale.
It is important to understand that a share purchase agreement is a completely different thing. If your business involves multiple owners, having a well-drafted shareholders agreement is crucial to align all parties’ interests before entering into any sale discussions.
What Are the Benefits of Using a Business Sale Agreement?
The main benefit of documenting a business sale with this agreement is that it provides clarity within a legally binding framework. This minimises the risks to the seller and buyer. It also ensures that the transaction goes ahead in an organised and transparent way.
The key benefits of having a business sale agreement drawn up by an experienced law firm are:
- Legal protection: The contract is legally binding, giving both parties security in the sale.
- Clarity on assets included: The agreement precisely defines the assets and liabilities involved.
- Warranties on information given: Warranties hold the seller accountable for the information provided.
- Indemnities against loss: The buyer can be indemnified for losses incurred post-sale.
- Dispute resolution process: A clear dispute resolution process prevents misunderstandings.
- Confidentiality clauses: These protect commercially sensitive information.
Working with a firm of solicitors like Heald Nickinson means we can identify any potential issues that might arise, which helps to prevent costly disputes. With a legally sound business sale agreement in place, you can enjoy peace of mind throughout the transaction.
Key Provisions to Include
Whilst agreement terms vary for each transaction, dependent on the nature of the business and the reasons for the transaction, key provisions commonly include:
The parties to the agreement – the seller and buyer, and whether they are corporate entities or individuals
- A description of the business: This helps to prevent future disputes.
- Sale price and payment details: This covers the total price, payment schedule, method, and any conditions. Details like the currency used, payment dates, and a breakdown of the price allocated to different asset classes will be specified. If deferred payments or earnouts are used, the triggers and schedules for these are included. Tax treatments and which party is responsible for applicable taxes should also be addressed.
- Assets included/excluded: All assets being transferred are itemised, as are any excluded assets. Asset inventories, property transfer documents, equipment lists, and IP assignment details will be attached as schedules. Intangible assets like goodwill, intellectual property, and contracts requiring transfer should be clearly identified. If equipment leases or software licences are assigned, consent requirements are detailed.
- Warranties: These provide assurance to the buyer on information given about assets. Financial and tax warranties confirm the accuracy of accounts. Title warranties affirm ownership of property and IP rights being transferred. Product and inventory warranties give assurance on quality and condition. Trading warranties attest to ongoing contractual obligations.
- Indemnities: To compensate the buyer for any post-completion issues or losses. Common indemnities cover undisclosed or inaccurate information, product liability claims, and breach of contract issues post-sale. Time limits, financial caps, and exclusions often apply. Third party consents to asset transfers may require indemnities.
- Completion process: The sequence of events to finalise the sale is set out. This will cover exactly how and when assets transfer, the point when consideration is paid, and requirements like de-registering company charges.
- Restrictive covenants: These prevent the seller from competing post-sale. Typical covenants include not soliciting customers/suppliers, restrictions on using IP, and not operating in the business area for a certain period. geographic restrictions may apply.
- Confidentiality: Commercially sensitive information is protected. Customer data, pricing, blueprints, and accounting information may require confidentiality both pre- and post-completion.
- Governing law: This sets the legal jurisdiction for resolving disputes. UK business sale agreements will generally specify English law as the governing law.
- Dispute resolution process: This outlines the process for resolving any disputes that may arise.
From the Perspective of a Buyer
For buyers, the priority when negotiating a business sale agreement will be value for money. The following factors will come into play:
- Guaranteeing acquired assets: The buyer will want to ensure they obtain all assets necessary to operate the business successfully after acquisition.
- Valuing assets accurately: To negotiate a fair price, the true value of all equipment, property, accounts, stock, and other assets must be assessed through due diligence.
- Limiting liability exposure: The buyer will seek to minimise liabilities transferred along with the assets. Taking on unwanted liabilities may impact their future profitability.
- Warranties to reduce risk: Warranties around asset condition and performance provide assurance for the buyer should issues arise later.
- Post-completion compensation: Indemnities allow the buyer to claim compensation if they incur losses attributable to the seller post-completion.
- Restricting competition from seller: Including non-compete and non-solicitation clauses prevents the seller from competing unfairly with the buyer after sale.
A buyer’s goal is to negotiate terms that maximise their protection, minimise risk, and limit liabilities assumed in order to acquire the business assets they need on the best terms possible.
From the Perspective of a Seller
For sellers, key priorities will likely be:
- Obtaining maximum sale price: The seller will seek to negotiate the highest possible price for the assets sold. Price may be negotiated individually for different assets.
- Minimising disruptions to business: Some assets may be excluded to allow business operations to continue with minimal disruption after sale completion.
- Limiting warranties and indemnities: The seller will want to resist warranties and indemnities as much as possible to reduce future liability.
- Confidentiality protection: Ensuring commercially sensitive data like customer information is not shared unless necessary.
- Receiving payment on time: Payment milestones and schedules will aim to provide cash flow for the seller at key intervals.
- Ensuring clear asset transfer: The seller will want to clearly transfer assets to the buyer to avoid disputes or claims assets were retained.
- Restricting employee moves: Key staff transferring to the new owner is sometimes prevented to limit business disruption.
The seller’s main goal is to maximise the sale price received for assets sold while avoiding future obligations, liability, and disruptions to residual business operations.
How to Negotiate a Business Sale Agreement
Negotiating an effective business sale agreement requires balancing the interests of both parties.
Some key tips include:
- Take legal advice: Work with a solicitor experienced in business sales to review the contract before signing.
- Start with non-binding heads of terms: This sets out fundamental commercial terms initially for faster progress.
- Document Corporate Approvals Clearly: Where seller and buyer are corporate entities, make sure board minutes show that company approvals are in place.
- Carry out due diligence: Ensure all assets are properly valued before finalising a price.
- Disclose all information: Being transparent about assets avoids disputes arising later.
- Consider deal structures to bridge price gaps: For example, earn-outs, deferred payments or asset leasing.
- Be realistic on warranty and indemnity limits: Overreaching here may derail negotiations closer to completion.
- Compromise on restrictive covenants: Non-competes lasting several years are often unreasonable.
- Keep communication open: Aim for positive discussions to move closer to an agreement.
Following these tips can lead to win-win negotiations and a business sale agreement satisfactory to both buyer and seller.
Contact Heald Nickinson for Legal Advice
A well-drafted agreement balances the objectives of buyers and sellers, reduces risk, and prevents future disputes from arising. Paying close attention to the advice here will help ensure your business sale is completed as smoothly as possible.
Our corporate law team at Heald Nickinson have extensive experience in navigating business sale agreements. Contact us today for transparent, personalised legal advice on the process.
