Business Sales & Purchases

When you are selling or buying a business, one of the first and arguably most important part of the initial stages of the process, will be to enter into confidentiality agreements.

This is because the potential buyer is likely to receive disclosure of confidential information as part of the due diligence process.

The information that will be disclosed will include trade secrets and valuable know-how information which absent a legally binding confidentiality agreement, may otherwise not be adequately protected.

Examples of confidential information include:

• Commercial records such as price lists, customer lists and suppliers.
• Unpublished copyright works
• Manufacturing techniques, processes, designs, drawings and algorithms
• Personal employee information
• Hardware configuration information
• Software, developments and inventions information
• Marketing, finance or other business information
• Know-how relating to the production of its products or delivery of its services

In most cases, once confidentiality is lost it cannot be recovered. Confidentiality must therefore be maintained at all stages. This means ensuring that confidentiality obligations are properly included in all agreements.

Our commercial team can assist you regardless as to whether you are the potential seller, aiming to protect their confidential information or a potential buyer being asked to enter into a confidentiality agreement.

COVID-19 has caused businesses of all shapes and sizes a significant number of challenges.

When someone is therefore buying a business, they need to try to understand and investigate what those challenges have been and how they have or may still affect that business moving forward.

The process itself remains unchanged and for most transactions, there will only be a modest amount of further enquiry required. The outcome of investigations in this new climate will allow the buyer to understand how the pandemic has impacted the business and decide how that is translated commercial

This article aims to provide an overview of the types of new challenges that buyers face in engaging in due diligence and the types of new issues to be aware of.

Lockdown problems

The due diligence process sometimes involves attendance at data rooms, site visits and other such activities that could simply not be carried out during the national lockdown.

This was overcome to a certain degree by the use of technology which allowed for data rooms to be virtual but advisors needed to consider whether their client could be protected sufficiently though enhanced warranties and indemnities or tailored insurance protection.

Some transactions however, will have paused and some buyers will not have felt able to proceed.

Whilst we are not currently in a lockdown situation, it should be carefully considered what steps can be taken to ensure that due diligence will be able to proceed as efficiently as possible.

This should involve:

1. Carefully timetabling of the due diligence process
2. Mapping out the types of due diligence that are intended and considering the practicalities.
3. Arranging site visits in advance and agree in advance if they need to take place at times when the site will be most quiet.
4. Considering carefully what enhanced warranties and indemnities are required to protect against issues that could not be fully investigated.

What are some of the key areas of COVID-19 related concerns at the moment:

Material Contracts – the pandemic has affected the ability of many contracting parties to perform their obligations.

The Buyer will need to identify:

• Contract breaches
• Whether they have been remedied
• Potential liabilities
• Effects on the business if it was another party who breached
• The threat of litigation
• The threat of another type of sanction
• Damage to reputation
• Termination rights
• Force majeure

Supply Chain – the pandemic may have significantly affected a businesses supply chain. The supply chain is of critical importance to the buyer functioning correctly and without it the buyer will need to consider the risks they face by proceeding with the business.

The Buyer will need to identify:

• Any adverse affect in the supply of products of services
• Any increase in costs
• Any change in timescales
• Any potential insolvency situations for suppliers
• Cash-flow
• How easy a supplier would be to replace
• The impact of the supply chain stopping or slowing down

Government assistance – many businesses will have benefited from one or more of the schemes offered by the UK government.

The Buyer will need to identify:

• Compliance with the various scheme
• Terms
• Implications of a change in ownership
• Use of the funds

Insurance – some businesses will have been able to make claims for the interruption to their business. Equally however, insurance may now be more expensive than ever and insuring against COVID-19 related losses is virtually now impossible.

The Buyer will need to identify:

• Any insurance claims made or pending
• The cost of insurance moving forward
• The effect on coverage
• If any new insurance is required in the post COPVID-19 landscape

Financing arrangements – the cost of COVID has meant that many businesses have had no choice but to turn to lenders to obtain funds to keep trading.

The Buyer will need to identify:

• Any loans which have been taken
• The terms of those loans
• The use of the capital obtained
• Any consequences of ownership changing hands

Employees – many businesses made use of the Coronavirus Job Retention Scheme.

Buyers will need to identify:

• Was the scheme used
• Who was it used for
• Were any salaries topped up
• Have there been any redundancies or are any pending
• Have staff now returned and if so in what capacity
• Are staff still due to return and if so when
• How has sickness levels been effected
• Have any staff had to shield
• If working remotely, what security measures have been implemented (including GDPR related)

Conclusion

When a buyer is approaching a business purchase in the current climate, they should take care to receive advice which allows them to fully consider the target business in light of the challenges presented by the pandemic.

These challenges may not mean that the buyer is put off from purchasing the business but it may have a significant impact on the risks that the buyer is taking and ultimately the value of the business.

How can we help?

Our team have been working with buyers throughout the pandemic and continue to do so. They are well placed to assist the buyer in identifying the information required, the risks that the transaction poses and what warranties and indemnities are required to offer a level of protection that they feel comfortable with.

What are Beckmann liabilities?

Prior to the Beckmann and Martin cases, it was generally accepted that when a business is sold and employees are being transferred pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 2006, none of the transferring employees’ contractual rights to pension benefits under an occupational pension scheme would transfer from a seller to a buyer.

This was due to the operation of the pensions exception under TUPE, which excludes from a TUPE transfer provisions of an occupational pension scheme which relate to old age, invalidity (e.g ill-health benefits), or survivors (e.g death benefits).

Following the Beckmann and Martin cases it became clear that rights under an occupational pension scheme which do not relate to old age, invalidity or survivors benefits do transfer under TUPE. (e.g rights to early retirement benefits and rights to redundancy pensions).

These rights are now known as ‘Beckmann rights’ or ‘Beckmann liabilities’.

They can potentially be expensive for an employer to pay and therefore potentially leave a buyer with a large future pensions liability in respect of transferring employees. This is a future liability that should be considered carefully at the due diligence stage.

The Beckmann and Martin cases have a retrospective effect and apply to transfers that took effect on and from 1 May 1982 (This is the date when the original TUPE regulations came into force).

The Beckmann and Martin cases are EU judgments. Broadly, EU judgments handed down on or before 31 December 2020 continue to be binding on UK courts and tribunals until the UK courts exercise their powers to diverge from them.

When handling the pensions aspects of a business sale, the question of how to deal with potential Beckmann liability is often a challenging question and buyers need to ensure that they arm themselves with sufficient information and advice in order to make an informed decision.

The Beckmann and Martin judgments have caused considerable uncertainty for buyers and their legal advisers when dealing with the pensions aspects of a business sale.

The later High Court case of Procter & Gamble v SCA  helped to clarify some of those uncertainties but various questions remained.

Until the position is clarified definitively by further case law, a buyer is potentially exposed to Beckmann rights transferred not only from the seller’s pension scheme (and employment contracts) but also from previous pension schemes (and employment contracts) to which the employees were a party to prior to transfer to the seller.

In the light of the remaining uncertainties, a buyer may prefer to take a cautious approach in the context of a business sale by assuming that all early retirement benefits would transfer under TUPE and taking appropriate steps to protect themselves against the potential transfer of such liabilities.

Steps should include:

1. Due diligence in relation to all pension schemes.
2. Due diligence in relation to historic employers of historic employers.
3. The insertion of warranties in the asset purchase
4. The commission of an actuary to estimate the amount of the potential liabilities that may transfer to them
5. obtain an indemnity from the seller in the business sale

How can they be dealt with?

In a commercial business sale, the buyer will need to decide, based on advice provided, how to deal with any potential Beckmann liability to them, arising from such rights transferring under TUPE.

How the parties deal with the risk of any Beckmann liability transferring from the seller to the buyer under TUPE depends on:

1. the negotiating strength of the parties
2. the buyer’s attitude to risk, and
3. the amount of the potential liability in the context of the value of the overall transaction

Once the extent of the potential liability is determined, the parties will need to agree on how that is then to be reflected in the deal.

Options include:

1. the seller could be asked to provide a time-limited indemnity covering the liability for an agreed number of years following completion.
2. the seller could be asked to provide an indemnity capped at a particular amount.
3. the seller could be asked to provide an indemnity covering only early retirement rights arising on redundancy rather than all early retirement rights.
4. the parties could agree an adjustment to the sale price to reflect the risk of the potential liability

These are complex cases and it is imperative that both legal and financial advice is obtained from advisors with knowledge and practical expertise in this area.

Auction processes can be used as a mechanism to sell a business rather than other more conventional negotiation procedures. The auction is designed to elicit competitive bidding from potential buyers and short circuit long negotiation periods being incurred.

Auctions can be run with lots of bidders, or they can be targeted with a select few bidders who have expressed a particular interest and appear to be serious contenders for proceedings with a purchase if the terms can be agreed.

This process comes with its advantage and disadvantages.

The advantages of an auction process for the seller are:

• the seller can secure the highest possible price where there are a number of competing bidders.
• the seller can control the conditions of the sale: for example, in preparing the initial drafts of the transaction documents and in considering mark-ups of the bidders, the seller will usually adopt and insist on a lighter, seller-friendly approach to warranties and indemnities in the share purchase agreement.
• if one bidder falls away, there will be another bidder or further bidders to step into their place.

The disadvantages of an auction process for the seller are:

• an auction process will require a large amount of preparatory work.
• an auction process is likely to expose the target to tactical investigation by its competitors.
• if one bidder falls away (for whatever reason) or if the auction process fails, other potential bidders may question why the deal fell through and that failure may damage any future plans of the seller to dispose of the target.

The advantages of an auction process for the bidder are:

• an auction process may give the bidder access to transactions that it might otherwise not have had access to.
• the bidder may be able to conclude an acquisition by auction more quickly than a private acquisition, as the seller will have undertaken the necessary pre-sale preparations.
• even if the bidder is not fully committed to the auction and does not progress beyond the initial stages, there may be commercial advantages from being involved.

The disadvantages of an auction process for the bidder are:

• as the seller can maximise the price, an auction sale may result in the bidder paying a premium.
• the bidder will have limited ability to be chosen as the preferred bidder if there are a number of competing bidders (unless it is prepared to pay a premium on the price) and it will also have limited ability to control the transaction process and to negotiate specific deal breakers.
• the bidder will need to show the seller that it has appropriate funding in place if it is to be considered to be a serious contender and to show certainty that it can complete the transaction.

The process

An auction process generally involves the following stages:

• selection of the seller’s professional advisers
• preparation of an information memorandum, management presentation materials and draft transaction documents
• the seller approaches potential bidders
• the signing of confidentiality agreements
• an initial round of indicative offers
• a second round of final offers
• the selection of preferred bidders
• exclusivity and final due diligence stage
• negotiation of final terms
• completion

If a company is considering selling in this manner, it is important that they obtained the correct advice and an early stage as the preparation work is extensive and can require input from various advisors.

When a business is being purchased by way of an Asset Purchase Agreement, it is not unusual for the buyer to be purchasing the lease for the premises from which the business operates as part of the overall transaction.

This is very common in situations involving a business within the retail sector. That is because it will be important for the buyer to be able to trade from the same premises post completion and thus be able to take proper advantage of the goodwill of the business.

There are various methods by which the transfer of the lease can be achieved but commonly the buyer will be assigned the lease from the seller with the express permission of the landlord.

Whether you are taking on the responsibility for a lease in this manner or accepting a new lease, it is imperative that you receive expert legal advice to ensure that the process goes smoothly.

It is also important that you understand the liabilities that arise from the lease and receive advice as to whether the wording of the lease should be amended to make those obligations more favourable.

Our expert commercial team routinely advise individuals and businesses in relation to commercial leases.

Speak to a member of our team today.

Case Study – MyCoach Coaching

We assisted Ben Haldon and Lucy Davies with the acquisition of the shares held by another shareholder within the company to leave them both as the sole remaining shareholders.

The transaction included the need for a compromise agreement to neatly end the leaving party’s employment status with the company. We negotiated this within the overall deal along with addressing some issues related to the ownership of various assets.

Following completion of the acquisition, we then assisted Ben and Lucy further with the drafting of a shareholder’s agreement to provide them both with protection moving forward.

MyCoach Coaching continues to be a client of ours and we have since assisted them with advice in relation to various contractual matters as their business continues to grow and flourish.

Ben Haldon said, “We have been instructing Johnson and Boon Solicitors for around 4 years whenever we have a legal problem or question. Their knowledge and expertise were particularly valuable during the period that we were buying out another shareholder of the company. Since then, our business has developed significantly and we value greatly the advise and support that we continue to have access too, whenever we require it.”

Case Study – Murrays Building and Timber Merchants

We assisted Murrays with their acquisition of various assets from another local competitor business as part of their extensive expansion plans.

The deal included the need for a fixed term agreement requiring the owner of the selling company to work with Murrays on a consultancy basis for a fixed period of time to ease the transition of a customer base being passed from the Seller over the Murrays.

Robert Midghall said, “I can honestly say from start to finish Rob Boon’s professionalism in dealing with the matter was one word, Fantastic. I am now ready to start another project with Johnson and Boon Solicitors which I am very confidant will be sorted and dealt with in the same manner.”

Case Study –Print and Sign World

We have assisted Print and Sign World with various acquisitions, License deals, trademark acquisitions and buy-out agreements.

Rob Jones said, “I have been working with Johnson and Boon Solicitors for around six years. They have assisted us with a wide range of commercial matters and their service is always of a high quality. They deal with matters quickly, efficiently and at reasonable cost. I trust them implicitly with all of my legal needs both for Print and Sign World Limited and the various other companies that I am involved with.”

Case Study – Baker Street Café

We assisted Christine Fielding with the acquisition of a café.

This proceeded as a asset purchase and involved negotiation in relation to the taking over a commercial lease which was in place for the premises.

Christine Fielding said, “Robert handled the purchase of our first business and the negotiations of the lease. I found him at all times to be very approachable. He explained each stage in terms I could understand. Any problems in negotiations were resolved quickly and satisfactorily. I consider it was excellent value for money and would certainly use his services again.”