The Legal Sale and Purchase Processes

Those involved in owning and running businesses often find that a major transaction (including a sale and purchase of a business) is a highly stressful time for them.
At a time when they already have responsibilities for successfully trading their underlying business – they find themselves needing to engage with transactional lawyers in what appear to be highly time-consuming legal processes, and whose aims may seem unclear.

This position can be particularly annoying, because it often seems to those involved, that the legal processes are delaying the completion of the transaction - which the interested party principles believe they have already agreed upon.

Evolution Capital's aim is to ensure that the legal process involved in a transaction is an integral part of the sale and purchase process - with the aim of ensuring a smooth progression of the overall transaction - so as to efficiently and economically take the interested party principles from initial discussions through to completion.

That aim is considerably assisted if the interested party principles have an opportunity to consider and understand why the legal elements of a sale process have evolved to be as they are.

The Pre-Sale Process

It is an accepted part of the marketing of a business for sale but those involved in the process on the ‘sell side’ will want to "keep their cards as close as possible to their chest". The seller will want to provide just enough information as is required so as to whet the appetite of the prospective purchaser, while not wishing to create any legal obligations – including any possible liabilities relating to its description of the business to the prospective buyer.

Unlike the legal protections which apply in (say) sale and purchase arrangements between retailers and consumers, there is very little protection generally afforded to a buyer of business assets under English law. This position is best noted in the relatively well-known English maxim of "Caveat Emptor"- or in more colloquial English – "Buyer Beware".

A buyer is generally entitled to redress for the effects of misrepresentations which may be made by a seller to the buyer with the aim of inducing a sale. However, if a seller of business assets is aware of an actual or potential problem with their business, they are generally fully entitled to stay silent upon that issue (i.e. there is no obligation to disclose the perceived problem to the prospective buyer).

The general position in English law, is that if a buyer purchases a "pig in a poke" – Or in more formal language, a business which is ‘not all that it was thought to be by the buyer’, then any recourse against the seller is likely to be severely limited. This will be particularly so because a well advised seller, as part of the legal process involved in the sale and purchase, will generally be successful in seeking not to be legally bound by most pre-sale statements regarding the business that it might have made to the prospective buyer, often as part of the process of the seller seeking to encourage the buyer to make a generous offer for the relevant business.

If this general position in English law is not addressed, then the likely result will be that the buyer is subject to some element of risk that the business which they are proposing buying is not worth what the buyer proposes paying for it. That element of risk would then generally need to be factored into the price that the buyer proposes paying – effectively by a reduction in the purchase price that the buyer might be minded to pay for the business, if it could satisfy itself that the business was all that the buyer believed it was.

Accordingly, while there remain transactions in which effectively a buyer merely hands over the offered purchase price and ‘hopes for the best’, because the seller would generally wish to elicit an offer from the buyer of as high a price as possible for the business being sold and purchased, it is generally the case that the seller agrees to give some element of comfort to the buyer as to the full worth of the business which the buyer proposes to purchase.

Two main legal processes, Due Diligence and a Warranty (and Indemnity) Protection Process, have evolved with the aim of giving the buyer comfort as to the worth of the business they are buying – and thereby allowing the buyer to offer more for the business than in a situation when the buyer is required to bear an element of risk as to the worth of the business it is buying.

Having given a general outline to the legal sales and purchase processes in next month’s article I will detail the two main legal buyer protection processes and describe the aims and potential effects to each party.

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