Whether you are an entrepreneur, an established business owner, or a corporate entity looking to grow through acquisition, buying a business is an exciting step, but it also comes with plenty of questions and no small amount of uncertainty. There's a lot to navigate: legal, commercial, and financial considerations all come into play at once, and sellers are dealing with their own set of challenges on the other side of the table. This article is aimed at prospective buyers and walks through the key things they should be thinking about, and explains how experienced legal advisers can help make the process as smooth as possible.
Defining your strategic objectives
Before you start looking at potential targets, it's worth getting clear on why you're buying and what you're hoping to get out of it. Most acquisitions are driven by a desire to access something that would take too long or cost too much to build independently: better resources, a more skilled workforce, an established reputation, proprietary technology, new markets, or more diversified revenue streams.
Having well-defined objectives makes it much easier to identify which targets are worth pursuing and keeps the process efficient throughout. An acquisition is also a good opportunity to revisit your own business plan, refresh your corporate finance objectives, and take stock of your funding position.
Establishing preliminary agreements
Once you've agreed the broad commercial terms with a seller, those terms should be recorded in Heads of Terms, which signals a shared intention to move towards a binding deal.
It's also the right moment to put exclusivity and confidentiality agreements in place. Buyers will want comfort that the seller won't be entertaining competing bids while they invest time and money evaluating the target. Sellers, meanwhile, will be sharing sensitive business information throughout the process, making a robust non-disclosure agreement essential. Well-drafted preliminary agreements help manage expectations on both sides and keep the transaction efficient from the outset.
Conducting Thorough Due Diligence
The law won't automatically protect you if things go wrong - the principle of caveat emptor (buyer beware) applies. That's why thorough due diligence matters. Due diligence typically covers finances, taxation, operations, contracts, employees (including TUPE obligations — see ACAS guidance at https://www.acas.org.uk/tupe-transfers), and intellectual property (see the Intellectual Property Office at https://www.gov.uk/government/organisations/intellectual-property-office), as well as softer factors like company culture. How deep you go will depend on your risk appetite, but as a general rule, investing properly in due diligence pays dividends later - you can only manage a risk once you know it's there.
Financing your acquisition
The acquisition structure will influence price negotiations. For instance, sellers may seek a premium on an asset sale since they lose the clean break that a share sale provides. The two main financing options are cash on completion and debt financing (see the British Business Bank at https://www.british-business-bank.co.uk for further resources on financing options), although many deals use a combination of both. Where regulated lending is involved, the Financial Conduct Authority's guidance (https://www.fca.org.uk) may also be relevant. Where there's a gap between the buyer's and seller's views on value, mechanisms such as vendor loans, deferred consideration, or contingent consideration can help bridge it. Experienced corporate finance advisers who understand both perspectives can be invaluable in keeping negotiations moving towards completion.
Securing protection through warranties and indemnities
Warranties and indemnities are the principal tools for managing residual risk after due diligence. Warranties are statements the seller makes about the business - if one proves untrue after completion, the buyer may have a damages claim. In a share purchase, warranties tend to be extensive, covering areas such as tax, employees, and intellectual property. Sellers should review these carefully and formally disclose anything relevant through a disclosure letter, which protects them against subsequent breach of warranty claims.
Indemnities work differently: they're a direct promise from the seller to cover the buyer pound-for-pound for a specific identified risk if it materialises post-completion. Both warranties and indemnities need to be carefully tailored to the deal, informed by what due diligence has uncovered.
Planning for post-completion success
Transaction documents will often include provisions to protect the value of what's been acquired. Restrictive covenants, for example, preventing the seller from setting up a competing business, are common (see GOV.UK guidance on employment contracts and restrictive covenants at https://www.gov.uk/employment-contracts-and-conditions), although sellers will typically seek limitations on these in terms of time or geography. Earn-out clauses are another useful tool, tying a portion of the consideration to how the business actually performs after completion. This can help bridge valuation gaps and align the seller's interests with the ongoing success of the business.
Trowers & Hamlins LLP has extensive experience advising business buyers across a wide range of sectors (see examples of such acquisitions at Trowers & Hamlins has advised on the acquisition of the historic Royal Clarence in Exeter | Trowers and Trowers advises Groupe Adequat on its acquisition of Solutions Driven | Trowers & Hamlins law firm) on all of the areas discussed above.
If you're thinking about making an acquisition, please get in touch to discuss your strategy and how we can assist. The earlier you bring experienced advisers on board, the better placed you'll be for long-term success.