As another day turns on the Covid 19 pandemic, accountancy firms are continuing to advance strategic plans to emerge victorious. While previously, we have seen a focus on financial management and contingency restructuring, there has been a clear shift in priorities over the past few months; accountancy firms, in particular, are once again looking to grow, and they are buying up smaller competitors in order to do so.
A popular way of facilitating such an arrangement is via a share purchase (if the target business is a company) or a business and asset purchase (if the target business is an LLP, traditional partnership or even, depending on the situation and tax position, as an alternative for a company). Depending on the structure, either a share purchase agreement (SPA) or an asset purchase agreement (APA) would be used. Whichever is relevant, if drafted properly to cover all bases, these documents tend to be two of the longest and most detailed legal documents. However, circulating online are some incredibly short form templates, which might lead some to believe that these are relatively simple documents to prepare. The litigation team at Debenhams Ottaway are often called upon to advise on the repercussions where such short form SPAs or APAs have failed to capture critical assets or, in circumstances where such documents are subsequently found not to be as initially thought.
The repercussions of such failings are significantly more complicated than the cause. The latter generally a result of simple oversight or on occasion, sloppy drafting. We have therefore set out our top five tips for buyers and practitioners alike, when faced with the preparation of a purchase agreement.
1) Due Diligence
The most fundamental part of any business acquisition is ensuring that you have properly carried out due diligence. Skeletons lurk deep in the closet and the only way to find them is by digging around. On a share purchase, one acquires the target company “warts and all” as it is only the owners of the company that change – all of the target company’s assets and liabilities remain. It is for this reason that an SPA would include pages of warranty statements given by the sellers about the past performance of the target business in order to provide information to the buyer and to provide the buyer with a means of redress if such statements are incorrect. An APA would also include a raft of warranties, though typically not as comprehensive in number.
As such, prior to purchase make sure you have at the very least a) reviewed the target business’ books and accounting records for at least the past five years, b) checked whether the target business is subject to any ongoing litigation or has any judgments against it, and c) make sure that the target business is either debt free or, if assuming liabilities, that there are no undisclosed debts or security obligations. Needless to say, no one wants to purchase a seemingly successful and profitable business only to discover that it’s embroiled in high value litigation which might either result in a judgment being entered against it or at least significantly damage the business’ reputation.
2) Know your business
No two businesses are ever the same. By understanding the mechanics of the business you are intending to purchase, you are able to properly consider what assets you might reasonably want (or not want). For example, if less than 4% of new customers were ‘walk ins’, you may wish to weigh up the benefit of taking on the existing business’ office lease. This kind of critical analysis will allow you to provide clear instructions for the purpose of preparing your purchase agreement but also give you a better indication of where the value lies in the business.
3) Protect the Goodwill
When buying a business, the goodwill is generally paramount. As such, well drafted and considered restrictive covenants (including non-competition & non-dealing clauses) are essential. We emphasise the word ‘considered’ as covenants which are too onerous will very likely be held unenforceable. The court will generally not ‘water down’ a restrictive covenant, it will simply be disregarded if held to be unreasonable, hence the reason to separate restrictive covenants into separate clauses and include a clear severance clause. It would be less than ideal, having spent considerable sums on purchasing the goodwill, to see that being exploited by the sellers and their new competitor business. However, one can typically include more onerous restrictions in terms of geographical scope and duration on a business purchase compared to what one may see included in an employment contract; this is on the basis that the seller(s) will receive adequate payment for the sale of the business. As usual, the matter will turn on its facts and the devil will be in the detail of the drafting.
4) Ready, Steady, Complete
When buying a business, condition precedents can be your best ally. The purchase agreement, whether an APA or SPA, should clearly set out all conditions which require resolution/compliance before a purchase can be completed. Such conditions may include clearance of the seller’s debt and transferring any banking approvals. Ensuring that such conditions are in the agreement avoids the risk of completion prior to any such conditions being met by the seller. Typically, corporate acquisitions simultaneously exchange and complete. However, should there be a split exchange and completion, it is also sensible to include a long stop date in the purchase agreement stipulating by which time any condition precedents must have been complied with. This may be accompanied by a provision which allows the purchaser the opportunity to withdraw from the deal if such preconditions are not met by that date if, for example, the deal becomes untenable as a result.
5) Bespoke is key
Most precedent agreements do contain standard clauses relating to the principal assets a buyer would reasonably want to assume. However, even standard documents issued by major legal service providers need to be carefully tailored to the transaction. For instance, while a standard APA will likely state that a buyer will take on the trading premises, a buyer would be missing a trick if it did not also specify that it takes an assignment of the website content, its intellectual property and rights to the domain name. Often these types of smaller, ancillary elements are overlooked and not expressly provided for in a purchase agreement. This can subsequently cause significant issues on a wider level.
There are also post-completion requirements to consider. These include assignments and novations of contracts, payment of any taxes such as stamp duty land tax and general administrative matters relating to payroll, pensions and insurance.
Purchase agreements can be a minefield to navigate. It is crucial to ensure you have a legal team who are not just able to draft and consider the purchase agreement, but to consider the intricacies of the deal and the assets which make it up.
Elliot Nathan is an associate in the dispute resolution team of Debenhams Ottaway, the law firm.