Running a process
Now that you have successfully organised your business, have attracted potential buyers, understand their drivers, and planned the deal structure to be tax-efficient, all that is left to do is get the deal over the line!
Running a process can be intense and time-consuming, however, this is where we can help. Our corporate team at Taylor Wessing has vast experience in representing selling shareholders, founders and management teams and navigating them through the deal process to a successful completion.
While you are doing the deal, you also need to be sure not to lose sight of your fiduciary duties as a managing director of a target company or, as mentioned above, the task of running the business. You need to continue running the business in the interests of its current shareholders and ensure it continues to perform 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 as 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 upward.
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 non-binding / indicative 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 is attractive. The number of bidders may then be reduced to a smaller number taken through to the second round, perhaps four or five, 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 conduct 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 share purchase agreement (the "SPA") that sell-side 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 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 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 offers from bidders who have completed due diligence and provided a draft SPA that they would be prepared to sign. At this stage, it is 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 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 the final deal documentation. 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. We will make sure the documents include what is required to protect your investment.
Warranty and indemnity insurance
Warranty and indemnity 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 warranty and indemnity 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 warranty and indemnity insurance provider to finalise the terms of the policy and pricing.
An alternative is for the seller and its advisors to agree a warranty and indemnity 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.
Signing / closing
As a founder, you will be most concerned with ensuring that once the SPA is signed, it is binding on all parties, and that the buyer has access to the money it needs to complete the sale at closing (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.
Signing and closing of the transaction may occur simultaneously or be split over time. A split signing and closing will be necessary if the sale is conditional upon the parties obtaining any approvals and/or consents (e.g., from regulators). You may need to comply with certain requirements in the period between signing and closing and we can advise you on agreeing and understanding your obligations. There will also be a lot to organise at closing, whether this occurs at the same time as signing or later, but we will help to ensure that the process of finalising your deal and receiving your money is as straightforward as possible.