If you are looking to expand your business interests into the UK, acquiring an existing company can help you break into new markets and acquire the equipment, skilled workers, and innovations needed to boost growth.
However, it is important to ensure that following the acquisition, you are not surprised with any unexpected or unforeseen liabilities.
It is vital that you conduct due diligence into the business you intend to acquire to gain a complete understanding of any potential risks that the business may have.
Research to assess the suitability of the business
Before approaching a UK business for acquisition, it is essential to do as much background research as you can.
Find out who owns the business, understand the financial position of the business, its key customers and if its house is generally in order, i.e. having written contracts with customers, suppliers and employees for example.
Once you make initial contact with the seller, you will need to obtain as much information as you can from them.
Some owners may be selling for retirement, others may think that a new owner could help the business grow, while some may have concerns about the business and are seeking a quick exit.
Learning more about the reasons for a sale could alert you to issues within the business.
You should also establish whether the business can be relocated, obtain information about patents and intellectual property, and find out about the company’s existing management team.
Financial due diligence
Financial due diligence is an important step for anyone planning to acquire a UK business.
It involves a thorough examination of the company’s financial health, including its assets, liabilities, income, expenses, and cash flow.
This process helps to identify any potential financial risks or liabilities that could impact the value of the business.
It also provides a clear and accurate picture of the company’s financial performance, which is essential for negotiating a fair purchase price.
Conducting financial due diligence is therefore not only important for understanding the financial state of the business, but also for ensuring a smooth and successful acquisition.
Draw up heads of terms (see previous article)
Heads of Terms summarise the deal terms agreed at the outset of the sale so that all parties are aware of what the key terms are – even if there might be some scope for changes along the way.
While Heads of Terms are not essential to an acquisition, there are many reasons why it is legally advisable to set them out.
- Good faith: Agreeing terms at the outset is usually an indication that both parties are acting in good faith to follow the terms agreed between them when entering into the transaction.
- Complexity: The acquisition of a business can often involve a number of complex issues such as delayed payments to the sellers or particular post-completion employment and introduction obligations which are best highlighted at an early stage.
- Exclusivity: This keeps both parties focused on completing the deal within a certain timeframe. Exclusivity often benefits the buyer but can also protect the seller if the buyer is targeting other competitors.
- Instructing advisers: Legal advice early on can help to ensure the Heads of Terms accurately reflect the overall intention of the parties and allows advisers to provide prompts about matters to be addressed, such as warranty periods or post-completion restrictions.
- Confidentiality: Heads of Terms provide an early opportunity to bind both parties into confidentiality restrictions which can be critical if customers of the target company are unaware of the potential sale, or the buyer does not wish for its potential expansion into a particular area of the market to be public knowledge.
Seeking legal advice early on can help to ensure the Heads of Terms accurately reflect the overall intentions of both parties and allows advisers to provide prompts about matters to be addressed.
Warranties
A warranty is a form of enforceable promise that a seller is often asked to give to a buyer in respect of the business being sold.
Warranties offer a way of reducing the risk in a transaction by asking the seller to provide a buyer with assurances as to the state of the business or the asset(s) at the time of acquisition. They can allow a buyer to claim for unexpected and undisclosed liabilities arising after the purchase.
When a seller discloses against the warranties in an acquisition agreement, it will give the buyer an idea of the key areas of risk in the business.
A disclosure letter from the seller will set out any matters that may qualify any of the warranties they have provided in the acquisition agreement. These are known as specific disclosures. There will also be general disclosures of various information, such as information available in respect of the business at certain public registries (e.g. Companies House).
Disclosures given by the seller are subject to an agreed standard which ensures that information cannot be disclosed in a manner which does not give the buyer any meaningful idea of the risk.
If the seller does not make a disclosure against a warranty and post-completion the warranty proves to be untrue, a buyer could bring a claim for breach of warranty.
Although making disclosures can lead to renewed discussions over the value of a business or asset, it is much better to have these conversations in a boardroom than a courtroom.
Open communication with the seller and a buyer carrying out a thorough and focused due diligence exercise will mitigate the risk of any unforeseen liabilities before acquisition.
How we can help
As a founder member of Mackrell International (MI), one of the largest international organisations of independent law firms in the world, we are uniquely placed to be able to advise international clients seeking to gain access into the UK market via acquisition of a UK company or business.
For tailored advice on acquiring a business in the UK, contact Maung Aye, Joint Managing Partner and Head of Corporate & Commercial, on 0203 972 6784 or via email at maung.aye@mackrell.com.
