The Window of Opportunity to Sell a Business
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The Window of Opportunity to Sell a Business Now that the New Year has started many business owners are reflecting on their positions and whether it is time to sell their businesses. Since the recession of 2008 there has never been a better time to sell your business, and at present we are in a seller’s market. However, there is a growing feeling that these “good times� will not continue beyond 2019, and so there is an additional motivation to business owners to reflect upon whether now is a good time to sell up.
Barney Leaf
John McDermott
Partner barney.leaf@laytons.com +44 (0)161 214 1632
Associate Partner john.mcdermott@laytons.com +44 (0)161 214 1657
laytons.com | 3
The Window of Opportunity to Sell a Business
In the last 10 years there has been a change in the way in that finance is provided and therefore how businesses
The purchase price mechanisms
are bought and sold. It used to be that most finance was
This can take the form of a full payment on completion,
provided by banks, but in the last 10 years, since the recession
but this is unusual. Either there will be a deferred payment,
commenced, there has been a move towards private equity
being an agreed sum and paid in instalments, or an earn-
funds, and pension institutions have placed a great deal
out mechanism, namely a payment that relates to future
of money within these private equity funds as the pension
profit or revenue. Approximately 21% of all 2017 transactions
institutions have seen a better rate of return from these funds
incorporated an earn-out mechanism. This payment is
than from other investments. As a result, there has been a
normally made each year and enables a buyer effectively
growth in the number of private equity funds and therefore
to leverage the business and pay the consideration from
in the amount of competition between these funds for each
the profits/revenue of the business. In order to do this it is
business. This has driven up prices to their highest point in 10
necessary for the sellers to ensure that they remain with the
years.
business during the period of the earn-out and also that the sellers have certain protections to allow the business to
Given this decade of change, it is worth reflecting on the
operate in the way that it operated previously. There is also
key components of a sale agreement, and how these have
the issue of whether a seller leaves during the period of the
changed over the last 10 years. In July 2018, a study of some
earn-out (the vast majority of sellers that remain with the
of the key changes of transactions across Europe showed
business leave within 12 months of a transaction completing)
that small to medium transactions (£15 million to £50 million)
and what happens in relation to the earn-out payments after
have, in many ways, become simpler as the business market
this date.
has matured, and acquiring and disposing of a business has become more common. We are sure this is also partly driven
Another mechanism that has been incorporated over the
by the fact that competition to acquire these businesses has
last 10 years is called the “locked box” mechanism. This was
increased and therefore the buyer’s standards have been
introduced mainly by private equity and was used in 25% of
relaxed slightly to allow the transaction to complete and
all transactions in 2017. (In transactions in excess of €100m,
avoid it missing out on an opportunity to acquire a successful
the figure was 88%.) The locked box mechanism allows for
business. The key issue to a buyer is the price paid for a
the accounts and the balance sheet to be agreed at a certain
business, and in this regard this risk burden has been passed
date, typically the last set of accounts, and a buyer agrees the
further to the seller.
sale price based on the date of this information. It calculates all cash and debt accrued after this date and if, following
Some of the key mechanisms typically now incorporated
completion when a set of accounts will be drawn up on an
within a share sale agreement are as follows:
agreed basis, the actual net-asset value does not agree with the locked box sum, the excess of any monies is paid to the seller and any negative figure is made good by the seller to the buyer.
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The Window of Opportunity to Sell a Business
Warranties
Security
The warranties given relate to the protections that a buyer
Where it was once used only in exceptional circumstances
will seek from the seller to give it comfort in relation to the
(e.g. if the seller was a private individual who lived abroad),
business that it is buying. Warranties vary from year to
now it is quite normal for a retention account to be opened
year and decade to decade depending upon how the law
and for some or all of the sale price to be held for a period
changes. For example, over the years there has been a rise in
of time in which a warranty claim could be made. This would
environmental warranties, and in those covering bribery, data
not normally be for the duration of the warranty period: it will
protection and security of IT systems. Standing behind the
usually be for a period of up to 12 months. Such security is
warranties, the seller has two lines of defence. First, there is a
now normal in 30% of transactions.
disclosure letter in which a seller provides information about any defects of the business in relation to the warranties (in
The most important aspects of any transaction are ensuring
effect, it discloses the extent to which the warranties are not
that your professional advisers have experience of transactions
accurate – once something is properly disclosed, the buyer
and a are familiar with the structure of a transaction
cannot claim to have been unaware of the defect). The other
document, and the personality of the potential buyers who
line of defence is the seller’s protections, which primarily take
will acquire your business.
the following form: Laytons has a large number of experienced lawyers who have 1. The seller will usually not agree to be liable for a sum
experience of many industries over many years of legal work.
greater than it is paid for the business. In larger deals,
If you would like to discuss any proposed transaction, please
in excess of ÂŁ50m, a percentage of the overall deal will
do get in contact.
be fixed as the maximum liability. 2. There is a de minimis (or minimum) provision, by which a seller will usually not be liable for any claim by the buyer under the warranties unless the potential claim is worth in excess of around 0.5%/1.5% of the consideration paid. This figure will be negotiated and will depend upon the balance of negotiating strength between the buyer and the seller. If the seller is in a very strong position, a buyer will only be entitled to the excess over this sum but it would be normal that once the excess is reached that it is entitled to claim the entire loss. 3. The warranties, and tax deed, will be subject to a time limit for a buyer to make a claim, normally between 12 months and two years for non-tax related warranties, as an audit will normally be required to flush out any issue, and six or seven years for tax warranties (given the period of time in which a claim can be made for tax). laytons.com | 5
The Window of Opportunity to Sell a Business
Corporate We advise on every facet of our client’s corporate legal needs through the complete life-cycle of an enterprise, from its inception, through its growth and expansion to, perhaps, its sale or flotation on a public market. Our teams focus on acquiring a deep understanding of the particular needs and objectives of our clients to deliver advice and outcomes that are tailored to those needs and objectives and which meet them swiftly and costeffectively. The approach to technical problems is informed, insightful and proportionate, and we take pride in viewing problems from a fresh perspective to provide innovative solutions.
Our Team Kathryn Beasley
Martin Donoghue
John Gavan
Solicitor kathryn.beasley@laytons.com +44 (0)20 7842 8061
Partner martin.donoghue@laytons.com +44 (0)20 7842 8016
Partner john.gavan@laytons.com +44 (0)161 214 1653
Dimitri Iesini
Barney Leaf
John McDermott
Partner dimitri.iesini@laytons.com +44 (0)20 7842 8081
Partner barney.leaf@laytons.com +44 (0)161 214 1632
Solicitor john.mcdermott@laytons.com +44 (0)161 214 1657
Daniel Oldfield
Jun Park
Christopher Sherliker
Partner daniel.oldfield@laytons.com +44 (0)20 7842 8037
Solicitor jun.park@laytons.com +44 (0)20 7842 8035
Partner christopher.sherliker@laytons.com +44 (0)20 7842 8015
John Skelly
Cameron Sunter
Liza Zucconi
Partner john.skelly@laytons.com +44 (0)20 7842 8025
Partner cameron.sunter@laytons.com +44 (0)20 7842 8036
Partner liza.zucconi@laytons.com +44 (0)20 7842 8092
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This information is offered on the basis that it is a general guide only and not a substitute for legal advice. We cannot accept any responsibility for any liabilities of any kind incurred in reliance on this information.
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