Now you just need to get through to a signed Share Purchase Agreement (SPA), to complete the process. This is step number 5 of our ‘7 steps to sell your company‘ article.

Who does what during SPA negotiations?

The buyer is usually responsible for drafting (or having their lawyers draft) the Share Purchase Agreement. This means that if you’re selling your business, your responsibility (and that of your advisors, like Devant) will be to review and negotiate the SPA that you receive from them.

The way these negotiations are conducted varies from transaction to transaction, and is heavily impacted by the approach of the advisors to the buyer and the sellers. Devant is keen on a practical, friendly and pragmatic approach to negotiation. While some elements of the negotiation are of a more technical legal nature, which might be of limited interest to you from a practical perspective, they all impact the level of risk that you take in your transaction. For this reason, it’s best to include both buyer and seller, as well as both parties’ legal advisors, in negotiations where possible.

This has the advantage of speeding up negotiations considerably. Rather than the lawyers having a lawyer-to-lawyer discussion and then each retreating to ‘take instructions’ from their respective clients, we can facilitate a constructive discussion so that progress is made on each call.

We have experienced resistance to this way of working, particularly where the other party’s lawyers are inexperienced in company sale and purchase transactions. For a lawyer who is unfamiliar with the ins and outs of an M&A transaction, having time in private to consult their reference material and senior colleagues is infinitely preferable to being ‘put on the spot’ in a live negotiation. Particularly when that live negotiation involves their client as well as the counterparty! We’ve also experienced push-back from some lawyers who are worried that their client will ‘say something silly’ if they’re involved in active negotiations. 

Devant’s approach to M&A transactions (as to all our client work) is to educate our clients so that they properly understand the risks and opportunities of the various elements of the deal. Our experienced and capable consultants will walk through each document with you ahead of any negotiation, so that we’re all clear on the pros and cons of the potential alternatives. By being well prepared in advance, we’re able to work as a team in the negotiation, exploring alternatives, discussing risks and sharing positions. We’ve found that this not only speeds things up, it also results in a better-informed client, who makes better decisions about this most important transaction.

Of course, there are sometimes ‘curve balls’ that crop up live in a negotiation, for which you and your consultant (or indeed, the other party and their advisor) haven’t prepared an appropriate response. When this happens, it’s the responsibility of the respective advisors to manage the situation, get a full understanding of the ‘ask’ from the other party, and suggest taking it away for further examination before coming back with a considered response. 

What if their lawyer insists on ‘lawyer only’ negotiations?

If you’re in the position where you and the other selling shareholders are excluded from direct negotiation with your counterparty, you will need to work with your legal advisors as efficiently as you can. Accept that things are going to take a bit longer, and be a bit more formal, but hopefully you’ll still get there eventually!

It’s important to read everything that you’re sent carefully. If you’re working with Devant, our consultants will always explain what the legal provisions mean to you from a practical and commercial perspective. There truly are no ‘silly questions’, so if you’re not clear on whether a particular point is important to you or not, do ask!  

Whether you’re working with us or have other advisors in place, do try to respond quickly to communications from your lawyer if they are doing all the negotiating on your behalf, and be as clear in your instructions as possible, so that you don’t contribute to the slowing-down of progress. And do ask questions whenever you’re not clear on the practical implications of any legal terms you’re being asked to agree to. If your lawyer responds that “it’s standard practice, everyone agrees to that” without explaining what the term means in real life, or what its implications might be, you might want to consider an alternative lawyer (you know where to find us!).

Divide and conquer (but remember that the SPA operates as a whole!)

Most Share Purchase Agreements have sections covering:

1. The purchase price and payment structure
2. The general principles of how warranties and disclosures will work, including any limits on claims made under the warranties
3. Any indemnities given by the sellers
4. Post-sale restrictions on the sellers
5. Who the sellers are, how many shares they have, and other particulars of the sellers
6. Details of the company being sold, and any subsidiaries
7. What each party will do at completion (including what other documents they will need to provide)
8. The detailed warranties made by the sellers in respect of history and operation of the business
9. The tax warranties and tax covenants
10. A description of the financial mechanisms being used to determine the final sale price, based on whether the deal is priced as a ‘locked box’ or based on ‘completion accounts’
11. Details of any specific assets relevant to the business (like properties, IPR, IT, etc)
12. If there’s an earn-out, how the earn-out will work, together with any obligations for the buyer post-acquisition

On top of all of this, there will be lots of technical legal provisions which are generally fairly standard (like the applicable law and jurisdiction) but may be subject to negotiation in particular circumstances.

In amongst this stack of provisions, there will be some that you, as a seller, are best placed to review, understand and respond to (like many of the warranties relating to how you’ve run the business, for example). There may be some that your accountant or financial advisor is in a better position to lead (the locked box/completion accounts mechanism and the amount of working capital required by the business, together with some elements of the tax warranties). The detailed tax covenants will need input from a legal tax specialist, while you may want to get a property specialist involved to look at some of the property warranties.

Part of the role of your legal advisor is to understand what your team looks like, and how best to work with and manage them. They’ll need to know:

• Who’s ‘in the know’ within your organisation (sellers often want to keep a planned sale quiet so as not to spook employees)
• What their areas of knowledge and expertise are, regarding your business
• Whether you are happy for your advisor to speak with them directly (for example, talking to your tax advisor about the tax covenant), or whether you want to be personally involved in all discussions, or to be the conduit through which all enquiries and conversations flow

Once your advisor has a good grasp of who you’d like to have involved in each element, they can work with you to allocate tasks to each member of your team (including themselves!), to ensure that each part of the SPA has been given the necessary attention. They will also be able to keep an overall picture, and to pull together any comments or feedback from others in your team, to make sure the transaction as a whole still makes sense and nothing has been missed.

Some specific pointers on SPA negotiation elements

For more details on understanding and dealing with the various warranty and disclosure points in the SPA, see the article on due diligence, warranties and disclosures.

For additional considerations regarding the price structure, completion process and earn-outs, see the article on completion and earn-outs.

While this isn’t an exhaustive guide to all elements of negotiating your share purchase, here are some thoughts on a few of the other key areas you’ll need to negotiate.

1. Post-sale restrictions on sellers – these are pretty normal, and are usually reasonable when you think about what’s happening in this transaction. If you’re selling a business that you’ve been closely associated with for a long time, your personal ‘brand’ will be tied into the value of the business. This means that if you were to start a competing business, or move to work for a similar business, your clients are likely to want to follow you, rather than stay with the company you’ve just sold.

From the perspective of the buyer, they want to purchase your company with all the goodwill and brand value associated with it. It’s rare for an acquirer to buy all of a company’s shares just to get their hands on its stock, or its building (although that is a possibility!). Generally they want the whole business as a going concern.

So in those circumstances, conditions restricting you as the seller from competing with the company you’ve sold for a period of time are a reasonable way to ensure they get full value from the purchase.

The challenge comes when the non-compete restrictions become too broad (you can’t sell to anyone you’ve ever sold to from this company) or too long (you can’t compete for 10 years). It’s important to consider the restrictions from a practical perspective, and see how they’ll impact the next 3, 5 and 10 years of your life. 

Unless you’re planning to retire on the proceeds of the sale, you may want to be able to earn an income or otherwise contribute to society at some point after completion. You might want to exploit the business network you’ve built up over many years to offer something different to what your old company sold – for example, if you’ve been selling accounting software for years, you might want to become a consultant supporting businesses in choosing accounting software.

So be specific about precisely what you’re not allowed to compete with. It should relate to the operation of the business as it is at completion, not to whatever it might become over subsequent years. After all, once you’ve sold it, you no longer have control over new products or services it might offer! 

2. Tax warranties and tax covenants – these are the realm of tax law specialists, and of your own business tax advisor. The warranties tend to relate to things your company has and has not done from a tax perspective. It’s helpful to get input from your company accountant, who will know what you’ve done, as well as from a specialist tax lawyer, who’ll be able to tell you how that relates to the warranties and covenants you’re being asked to give. 
3. Some financial terms – Locked box and completion accounts are two different mechanisms for deciding how much cash and debt there is in the business at completion. This matters because companies are often sold on a ‘cash free, debt free’ basis, or may be expected to have enough working capital to be able to operate under their own steam (i.e. without a cash injection from the buyer) for a certain number of months. 

This means that you have to have an agreed mechanism with the buyer for working out how much cash and debt are in the company at completion, and what amount of working capital should be left in, to enable the business to operate safely for an agreed length of time.

For example, if the agreed purchase price for your company was £1,000,000 on a cash-free, debt-free basis, but:

• The business has £150,000 in the bank
• It owes £7,500 on an outstanding loan
• There are generally around £90,000 worth of customer invoices ‘in the works’ on a rolling monthly basis
• The business has a monthly run-rate (expenditure) of £65,000

• you (with help from your accountant) will need to be able to work out the appropriate adjustment to the price to take these things into account (so whether the buyer needs to pay a bit more to pay for the net cash in the business, or a bit less, if there’s net debt). 

Translating the monthly run-rate and regular monthly revenues into a working capital allowance is not a precise science, and it’s likely that you, with support from your finance person, will have some discussions with your buyer to agree an appropriate number. It’s important to be clear on the accounting rules you’re going to use to do this maths, as it can have a big impact on how much you actually receive for your business.

Deciding whether to calculate the net adjustments on a locked box or completion accounts basis may not make a significant difference to the amount of money you actually receive for your business, but it may affect:

• how much you receive when
• how many sets of accounts you need to prepare (and therefore your transaction costs, if this is something you pay an external specialist for)
• whether there will be post-sale adjustments to the price
• whether any adjustments are more likely to be up (the buyer paying you more money) or down (you returning cash to the buyer)

The locked box mechanism takes the company’s cash position at a specific date pre-completion and works out how that affects the purchase price. An SPA using a locked-box will talk about ‘permitted leakage’, which is essentially money that the business can spend between the ‘locked box date’ (the date to which the locked-box accounts are prepared), and the completion date. You’d expect this to include things like staff salaries, business rent and the company’s normal outgoings in the usual course of business.

If the business were to spend an unusual sum during this period – say, you decided to purchase a fancy new van that wasn’t in the budget because you saw one on offer – that expenditure would be leakage that was NOT permitted. In that instance, you may need to have a conversation with your buyer about whether they would expect you to deduct the cost of the van from the amount they pay for the business. Of course, they may be really pleased you’ve acquired a van at a great price, and be happy to allow this expenditure as the business has acquired a useful new asset.

The concept of leakage would also cover, for example, unscheduled bonuses that you chose to pay to staff during the time between the locked box date and completion. 

If your SPA is prepared on the basis of completion accounts, rather than a locked box, it will specify the estimated values of the key financial metrics, on which the completion payment will be calculated. It will then provide that after completion, a set of accounts will be prepared that identify exactly what those estimated values were in practice, as at the completion date.

Having your accountant and the buyer’s finance people agree the mechanism for determining the completion accounts is a good idea. Depending on how well established your company’s accounting processes are, you may be able to simply state that the completion accounts will be prepared on the same basis as all your previous accounts, and the buyer may be satisfied with that.

If your finance person has applied some slightly dodgy treatment to your accounts in the past (for example, recognising all the revenue from a 3-year contract in the first year), your buyers may challenge this approach, and might want to specify some specific accounting treatments for the preparation of the completion accounts.

Once the completion accounts have been prepared and approved, you’ll be able to work out whether the buyer owes you some more money, or whether you need to repay some to them.

Bear in mind that if you’ve agreed some element of deferred consideration or earn-out, it may be possible to negotiate for any overpayment you’ve received from the buyer at completion to be deducted from subsequent payments, rather than repaid by you in cash.

4. Other assets – hopefully, you’ll have worked through our pre-due-diligence, to ensure that all your assets are nice and tidy before embarking on the sale process. If not, you might want to consider whether all the assets that currently belong to the company are relevant and necessary for its continued operation, and whether there are any that you might want to move out of the business pre-sale. For example, if the company has three well-used vans, and the acquirer has their own modern fleet of vehicles, you might choose to purchase one of the older vans from the company at an appropriately low price, rather than including it in the sale. 

It’s also common for businesses with property to put the property into a pension fund, so that the company pays rent to the fund. This is a complex area, and you should take specialist advice if this is the situation with your business – will the new owners want to remain in the business’s current premises post-sale? How long is left on the lease? If you’ve been a little casual about the paperwork while you effectively owned both-halves of the agreement, this is definitely something to get sorted out during the pre-due-diligence phase!

Bear in mind that the buyer will want information about all of the assets to be included, and may add specific warranties to cover them, depending on what they are.

Need any help with your company sale or your SPA? Schedule a no-obligation call and we’d be happy to help.