Our team of specialist Corporate Solicitors provide advice to a broad range of clients including PLCs, owner-managed businesses, SMEs, management teams, private equity investors and serial entrepreneurs on all aspects of mergers and acquisitions (M&A) including:
- Business acquisitions and disposals;
- Earn-outs and deferred consideration;
- Group reorganisations;
- TUPE and employment issues;
- Due diligence;
- Transaction specific property-related matters.
The sale of assets is a common means by which a business can be bought and sold.
Key features of an assets sale are:
- Those assets to be sold and those assets to be excluded from the sale are clearly identified in the sale agreement. For a buyer, the ability to “cherry-pick” the profitable assets and leave behind the unprofitable assets is attractive;
- The current liabilities and creditors of the target business are (unless agreed otherwise) generally excluded from the sale and remain with the seller;
- Due to the specific nature of assets being acquired, the buyer’s need for protection in the sale agreement in the form of warranties and indemnities is reduced (as compared with a share sale).
For both the buyer and the seller, the costs involved in the sale of assets are likely to be lower than a sale of shares. This is due to a reduced level of due diligence to be required by the buyer and a less extensive requirement for warranties and indemnities in the sale agreement.
Heads of Agreement
Once agreement in principle has been reached between a seller and buyer (particularly in relation to the price to be paid), it is advisable for the parties to enter into heads of agreement.
The heads of agreement will contain the essential terms of the transaction, they will form the basis upon which the legal documents can be drafted and will help to ensure that time is used efficiently moving forward. The heads of agreement are generally not legally binding with the exception of exclusivity (for the buyer) and confidentiality (for the seller).
The Asset Sale and Purchase Agreement
The asset sale and purchase agreement will vary considerably from one transaction to the next, but some of the more significant points are as follows:
- The price payable for the assets is apportioned between the assets being acquired, which may have tax advantages;
- Apportionment between the seller and the buyer before and after the completion date of liabilities, periodical payments, deposits and prepayments;
- The transfer of employees to the buyer pursuant to TUPE;
- The transfer of a business as a going concern is usually exempt from VAT (provided that certain conditions are met);
- The seller will give a series of warranties (or contractual promises) to the buyer in relation to various aspects of the affairs of the business. Warranties serve the dual purpose of providing the buyer with a remedy for breach of contract if a warranty is breached (therefore allowing a price adjustment post-completion) and also by promoting the flow of information regarding the affairs of the business from the seller to the buyer in the form of a disclosure letter from the seller. A disclosure letter will set out those facts and circumstances which are inconsistent with the statements made in the warranties;
- If the buyer has any specific issues of concern then these may be addressed in the form of indemnities;
- Restrictive covenants are included to protect the buyer from the seller setting up a competing business or poaching customers/suppliers and employees of the business;
- If a deal is funded by a third party, or through a loan, then the funder may wish to take security over the company and/or its business. A seller may also wish to take security if the purchase price is to be paid in instalments over a period of time post-completion;
- Where the price includes an earn-out arrangement whereby all or part of the purchase price is calculated by reference to the future performance of the business, a seller should consider suitable protections to ensure that the operation of the business of the company is protected.