There are 2 methods of acquiring a business. One is to buy shares of the company that owns the assets. The other is to buy the assets which make up the business, in some cases together with certain liabilities of the business.

The 2 are fundamentally different. If shares in a company are purchased, all its assets, liabilities and obligations are acquired (even those that the buyer does not know about). If assets are purchased, only the assets (and liabilities) which the buyer agrees to obtain and which are identified are acquired.

An asset purchase is often more complex than a share purchase due to the need to transfer each of the separate assets constituting the business. More consents and approvals are likely to be required than on a share purchase; for example, the consent of customers and suppliers to the assignment or novation of existing contracts.

There is, however, a greater amount of flexibility on an asset purchase. If, for example, a target company has liabilities which cannot be easily quantified or identified, or if only part of the business of the target company is to be acquired, then an asset purchase may be the favoured option.

The other key commercial difference between the 2 transactions is in the nature of what the buyer acquires: on a share purchase it acquires a company owning a business and running it as a going concern (subject to any change of control provisions).

In contrast, an asset purchase will not automatically transfer contracts (other than employment contracts in a relevant transfer) or existing trading arrangements to the buyer. Whether this is an advantage or a disadvantage will obviously depend on the attitudes of third party customers and suppliers, the buyer’s strategy for the acquisition and how it intends to integrate the new business.

As well as the commercial considerations, there are important tax considerations to be taken into account when structuring an acquisition.

Management buy-outs and buy-ins

Management buy-outs or MBOs involve the existing management of a company acquiring a significant part or the whole of the company. These transactions will often be funded by a combination of debt finance and outside private equity finance (referred to as a leveraged buy-out). Legally there are many similarities to an ordinary company acquisition though there are certain unique challenges that need to be addressed.

Due diligence and the giving of warranties in the sale and purchase agreement will likely differ from the ordinary procedure based on the fact that the buyers of the company (as its managers) know more about its day-to-day affairs than the sellers (as its shareholders). Additional documentation will also need to be prepared to govern the relationship between individual lenders and between lenders and the management of the company.

One or more new companies may be incorporated as part of the transaction to gain advantages in terms of taxation and convenience. It is quite common for the relationship between management and private equity investors to be governed at least in part by the articles of association in a company to which both parties subscribe.

An MBO can be an attractive exit plan for outgoing shareholders as it ensures continuity of management and avoids the need to disclose any confidential information to parties outside the company.

Management buy-ins or MBIs involve outside investors buying-out a significant part or the whole of the company and then taking over its management.

This typically varies from a private equity driven MBO in that the private equity investors have a much more direct influence on the outcome and realisation of their investment. MBI teams will typically not have the detailed knowledge of the business that the existing management does, but often come with extensive sector experience and therefore the potential to increase profitability in the company and generate good returns for the shareholders. A buy-in management buy-out or BIMBO is a hybrid of an MBO and an MBI and involves a combination of internal and external parties taking over the management of the company after the buy-out.

Seller’s preparatory steps

Ideally, a seller will be in a position to prepare for a sale and maintain control of the sale process. Whatever the reason, a seller should be sure of its objectives and plan to achieve them.

One of the issues for a seller, assuming a sale is voluntary and has no particular time pressures, will be to decide whether to market the target business actively and openly, perhaps by holding a sale by auction, or whether to approach potential buyers individually. A company may already be aware of interested parties such as competitors, suppliers or distributors or the business’ own management. Otherwise, professional advisers can help unearth a wider field of buyers.

There are a variety of steps that a corporate seller can take in order to prepare a business for sale, particularly if the seller is part of a group:

• Effect a pre-sale reorganisation by transferring assets intra-group. For example, the assets to be sold could be transferred into a newly-incorporated subsidiary as part of a hive down.
• Identify and consider how to deal with assets which are shared by the business to be sold and other businesses within the group. These may include, for example, intellectual property and employees.
• Ensure that information which the buyer is likely to require as part of its due diligence exercise is readily available and up-to-date. This will include, for example, information about properties, financial information, key contracts, actual or pending litigation and so on.

Preliminary agreements

Before the seller and buyer get as far as negotiating the asset purchase agreement, there are a variety of agreements which they might sign:

• Confidentiality agreement: Most sales will involve the buyer having access to significant information about the target business, some of which may be confidential. It is therefore standard practice for a seller to ask any prospective buyer to enter into a confidentiality agreement before making any information available.
• Exclusivity agreement: Embarking on a prospective purchase will usually involve a buyer in a substantial investment of time, effort and money. Buyers will often therefore seek protection against “gazumping” by requiring the seller to agree not to negotiate with other parties for a given period – often referred to as a “lock-out”.
• Heads of terms: Parties to a proposed acquisition will often reach agreement in principle on the key terms of the acquisition before beginning the process of due diligence, disclosure and drafting the asset purchase agreement. It is common practice to record these terms in writing as heads of terms.

The basic rule is that heads of terms should cover “deal” points rather than drafting points and important deal points rather than routine points. Heads of terms are usually not intended to create any binding legal obligation on the parties, although they may contain individually binding provisions, such as confidentiality and exclusivity clauses, if these are not set out in separate agreements. The clauses which are to be binding should be clearly identified.

Although heads of terms may not be legally binding, most company executives consider them to be morally binding, at least in the absence of a significant new development. They should therefore be approached with caution and preferably with the involvement of professional advisers.

Due diligence

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