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Buying or selling a business? It pays to agree key terms upfront

| Published on October 19, 2018

Adrenalin may be running high if you are on the verge of buying a business or selling the company you have built from scratch.  You may have already sought professional advice regarding the company valuation but there are other critical issues on which advice will also be needed during those early heady days of negotiations.

To aid the smooth progress of a business sale or acquisition it is advisable to agree the key terms of the deal first, together with the mechanics of how the deal will be done.  These should be set out in a heads of terms document which will act as a road map for dealing with all the stages you will need to go through to conclude the deal you have negotiated.

Heads of terms are not legally binding, but they represent an agreement in principle about how matters ought to be handled. They also demonstrate a serious commitment to commence the process as soon as possible and to ultimately conclude the transaction.

Terms to be included

The range of topics covered in the heads of terms will vary depending on the nature of the transaction, but the process of buying or selling a business has many stages and so it is usual for certain key matters to be addressed, including:

  • the price and how this will be paid;
  • whether the deal going ahead is subject to any conditions, such as shareholder approval;
  • what will happen to existing employees, and in particular whether the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) will apply;
  • who will be responsible for obtaining any third-party consents or permissions required before completion can take place;
  • the procedure that will be followed to ensure all existing customer and supplier contracts are transferred;
  • how the disclosure of information by the seller will be handled;
  • any confidentiality obligations that will be imposed on the buyer;
  • how the transfer of property and other assets will be co-ordinated to ensure everything is transferred at the same time;
  • who will be responsible for drafting the main contract and any ancillary documents;
  • how exchange of contracts and formal legal completion will be conducted; and
  • suggested timescales.

Exclusivity arrangements

An issue that almost always arises when heads of terms are being discussed is exclusivity arrangements to guarantee that, for a set time, the seller will not enter negotiations with anyone else.  This is to give the buyer a degree of assurance that, while preliminary issues are being dealt with and costs are being incurred, the seller will not engage in parallel negotiations with another party who may be waiting in the wings.

It is important to ensure that an exclusivity agreement is legally binding.

Liability for misrepresentation

While the heads of terms themselves are not intended to be binding, it is important to be aware that any statements made as part of the negotiation process or provided in response to requests for information could be deemed to be representations.  Inaccurate representations could expose you to a claim for misrepresentation or negligent misstatement, which may leave you liable to pay compensation or could cause the deal to fall apart.

To reduce the risk of this happening, the sale or purchase documents will need to include a provision defining the statements that should and should not be relied upon and in any event limiting liability for misrepresentation to the extent possible.

For advice on agreeing heads of terms or any other corporate or commercial matter, please contact the commercial team at our offices in Poole on 01202 725400 or Dorchester on 01305 251007.  Visit us at www.hklaw.eu and follow us @HumphriesKirk on Facebook, Twitter and Linkedin.

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