In a rush? How to get a deal done quickly
The timeless legal principle of caveat emptor, or “Let the buyer beware”, means that over time the legal process and steps to buying anything (but particularly a business) have become more and more involved. After all, who wants to find out they’ve made a fundamentally bad deal or bought something that just isn’t worth what they’ve paid? Jobs and reputations have been lost for less.
Sometimes, however, you just need to do a deal quickly. It may be as a classic distressed deal where the buyer needs to sell to avoid financial ruin, or it could give you the competitive edge you need to make yourself look a more attractive buyer or it could just be that the sooner you do the deal the sooner you can focus on running the business and growing it or moving on to the next investment. Whatever the reason, understanding what needs to be considered and what issues you might encounter in trying to complete a deal swiftly is important to its success and in this article, Stuart Hatcher sets out some of the things to think about.
Buyers: be clear about what you want to buy
Share sales are generally considered quicker transactions to be able to complete than asset sales, as the target company already owns the business and assets and so with targeted due diligence a transaction can be completed more quickly. The risk with this approach is that by acquiring the company you also acquire all of the historic liabilities, including any tax liabilities.
Against that, an asset sale can be undertaken quickly if it is just the purchase of specific assets although due diligence will still be required to ensure you know what you are buying and can complete all the necessary transfer formalities. A business sale can also avoid acquiring historic liabilities but can mean that other processes need to be followed, such as TUPE consultation and release of bank or other third party security.
Sellers: talk to your lenders early
Even if the need to get a deal completed quickly is not because of a potential insolvency situation (in which case speaking to your lenders should have happened long before), you should talk to your lenders and engage with them early on. It is critical you involve your lenders as, in the case of an asset sale, they may need to consent under any banking facilities and/or release security and in a share sale to ensure they are aware of implications for the business going forward and to deal with any consent or security issues. Failing to engage early is likely to cause delays if not crater a deal entirely.
Run a strict process
This sounds obvious and every party to a deal will always insist that they’ll run a strict and timely process, but if you want to complete a deal quickly you’ll need to appoint advisors who know what they are doing, have bought in to the need for speed and have the capacity and capability to run a strict process. From the seller’s perspective it is crucial that you are very clear as to what diligence will be possible and that you have your key documents organised and available to allow essential diligence to be completed quickly. Limiting bidders, having clear parameters of expectation for the sale (price and other terms), very clear milestones and deadlines, freeing up your own and your key staff to run the process and optimising the use of technology will be crucial to a swift conclusion.
Consider anti-embarrassment provisions
Given current uncertainty relating to valuation and prospects of businesses, and with perhaps little time (or funds) to undertake a valuation, including anti-embarrassment provisions will provide a seller with some comfort that they are receiving a fair price for their business. Including such a provision will also help a buyer give the seller comfort that the deal makes sense and having to do it quickly is not an attempt to take advantage of the circumstances.
Use of insurance and other risk mitigation options
In circumstances where time for a due diligence exercise is limited the use of insurance may help complete the transaction. The insurance market is now geared up, more than ever, to respond to a fast moving transaction and can turn around policies in a matter of days (although the challenge will be the extent to which due diligence has been undertaken). Insurers are also willing to provide “synthetic” policies where there is more limited diligence albeit with higher premiums. In addition, certain businesses, such as Innoma Capital, are willing to take specific contingent risk items out of a transaction and are set up to move quickly and help unblock transactions in some circumstances.
Consider alternative options to a sale
Finally, and particularly in circumstances where there is an insolvency risk, consider whether you can use different funding options as a way to protect the business and ultimately exit. These options could include “own to loan” transactions or the use of convertible notes which will allow the business to access funds swiftly and potentially trade out of a tough economic situation, or to give the business time to ready itself for a sale or partial sale.
A quick deal isn’t going to be the right way to proceed in every sale and there is merit – where possible – to take the time to find the right buyer, optimise the sale structure, provide full due diligence and also use insurance and other risk options where possible, but there is not only one way or only one speed to do a deal.
If a deal needs to be done quickly – it can be, but given that there are a number of options to consider and a number of ways to proceed, speaking with your advisors early on is essential so that a plan can be put in place and executed promptly and efficiently.
Disclaimer
This note reflects our opinion and views as of 17 August 2020 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.
Stuart Hatcher is a Partner in the Corporate team.