Running a process
Progressing the deal
Now that you have successfully organised your business, attracted potential buyers, understood their drivers, and planned the deal structure to be tax-efficient, all that's left to do is get the deal over the line.
Running a process can be intense and time-consuming; this is where we can help. Our Corporate team at Taylor Wessing has vast experience representing founders and management teams and navigating them through the deal process to a successful completion.
While you're doing the deal, you also need to be sure not to lose sight of your fiduciary duties as a company director or, as mentioned before, the task of running the business. You need to keep running the business in the interests of its current shareholders and keep ensuring the business is running successfully. An unforeseen dip in turnover or profits at this stage could lead to less favourable terms or, possibly, to buyers walking away from the deal altogether.
Auction process
Target businesses are often sold in auction processes; sellers are able to maintain control by dictating the timeline and non-negotiable items and creating competitive tension that will drive the price and deal terms upwards.
Following the signing of confidentiality agreements, an auction will begin with bidders being provided with a process letter setting out when bids are due and what they must include. Bidders are often asked to provide a first round bid on the basis of an information memorandum, which is usually prepared by corporate finance advisors and sets out key information about the business, its prospects, and why it's attractive. The number of bidders may then be reduced to a smaller number taken through to the second round, but this depends on the deal process.
Bidders will then be invited to access an online data room, review any vendor due diligence reports, and attend management presentations to further their due diligence. These documents will have been produced by the sell-side in advance. Bidders may also engage with potential lenders and W&I insurers (for more on this, see below), if required.
Typically, bidders will also be provided with a draft acquisition agreement (the SPA) that your lawyers will have drafted. Bidders will be asked to submit a mark-up of the SPA to the seller as part of their bid in a form that they are prepared to sign. If you or the management team will be shareholders after completion of the sale, bidders will also be asked to mark-up or submit a proposed equity term sheet, which will set out the key equity terms so that they can be agreed upon in principle between the parties. While a term sheet is not usually legally binding, it is helpful in ensuring the parties are all on the same page before proceeding to the longer-form documents and for comparing different bids in the round.
If the auction process is a multi-stage process, successful bidders may be taken to stage three, where they will be provided with more information on the target business (the whole data room may not be made available to them at stage two to help maintain greater confidentiality, particularly if strategic buyers are involved) and invited to improve their bids.
At the end of the auction process, your aim will be to have several fully funded offers from bidders who have completed due diligence and provided a draft acquisition agreement that they would be prepared to sign. At this stage, it's usual to provide one of the bidders with exclusivity, whereby they will be invited to sign an exclusivity agreement giving them the right to be the only bidder with whom you have negotiations for a certain period (often four to six weeks) to provide time to agree on the final documents and proceed to exchange and completion.
During the exclusivity period, the preferred bidder, the sellers, and their teams of advisors will work to agree on the final deal documentation, which will include the legal agreements, business plans, funds flow, locked box accounts, and warranty and indemnity insurance policy.
The legal agreements will include:
- The SPA – this sets out the main terms of the acquisition, the documents to be delivered, and the actions to be taken upon completion.
- The investment agreement – this is an agreement between all of the shareholders that details the principal equity terms and records how the group should conduct its business affairs in the future. It is also referred to as a subscription and shareholders' agreement or just shareholders' agreement.
- The articles of association – these contain internal rules covering the governance and shareholder rights in the company. This document is publicly available on Companies House for companies incorporated in the UK.
It's fairly common for the exclusivity period to be extended to provide more time, so there is usually no need to be concerned if this is required. During this period, it is useful to be able to devote as much time and attention as possible to the sales process. We can relieve the burden of much of the project management, but setting aside time for update calls and the disclosure process, in particular, will be helpful.
Once the documentation is all in place and the bidder has their funds ready to transfer, it will be time to proceed to exchange and completion.
Warranty and indemnity insurance
Warranty & indemnity (W&I) insurance is generally taken out by the buyer. Nevertheless, sellers can ease the process by seeking indications of terms and pricing from potential insurers early on.
We can help put you in touch with W&I insurance brokers who can test the market. Brokers then produce a non-binding indication of terms document, providing a recommendation of terms for a buyer to take out. This gives the bidders a head start in the process of putting the insurance policy in place and is known as a 'soft-stapled' policy. The successful bidder would then negotiate with the preferred W&I insurance provider to finalise the terms of the policy and pricing.
An alternative is for the seller and its advisors to agree on a W&I insurance policy and pricing with the insurer during the auction process (on behalf of the successful bidder) and ask the successful bidder to enter into the policy (known as 'hard stapling'). This has the advantage of streamlining the process, giving the parties certainty, and enabling the commercial warranties to be aligned with the policy. However, it reduces the buyer’s flexibility.
Many buyers have their own broker relationships and prefer to put their own arrangements in place. Hard-stapled policies also tend to be expensive in terms of both cost and time investment because the sellers cannot guarantee that the buyer will enter into the policy.
Exchange and completion
As a founder, you will be most concerned with ensuring that once the acquisition agreement is signed (also known as 'exchange'), it is binding on all parties and that the buyer has access to the money it needs to complete the sale (known as the buyer's 'certainty of funds').
Your corporate finance advisors should undertake the required due diligence to ensure the buyer has certainty of funds, and we may put in place appropriate legal arrangements where required. We will also guide you through the signing process. This may involve some of the parties giving you or others a power of attorney so that you have the power to sign on their behalf. This is often the case if there are a large number of sellers.
The signing process itself is now most commonly conducted virtually, but even so, there are certain formal requirements with which you will need to comply. We can help guide you through that process.
Exchange and completion of the transaction may occur simultaneously or be split over time. A split exchange and completion will be necessary if the sale is conditional upon the parties obtaining any approvals and/or consents (eg from regulators, shareholders, suppliers, customers, and/or landlords).
You may need to comply with certain requirements in the period between exchange and completion, and we can advise you on agreeing and understanding your obligations. There will also be a lot to organise at completion, whether this occurs at the same time as exchange or later, but we will help to ensure that the process of finalising your deal and receiving your money is as straightforward as possible.