How does a company sale and purchase process work? Phases, documents and key legal aspects you need to know

One of the key concerns many of our clients have when considering the sale of a company is where to begin. A company sale is a complex transaction involving multiple stages, substantial documentation and strategic decisions, all of which can have a significant impact on both the value of the deal and the likelihood of a successful outcome.

Accordingly, we will examine the various stages of a company sale and purchase process, with the aim of explaining what each phase involves, the key issues that should be taken into consideration, and the matters most likely to give rise to difficulties if they are not properly addressed from the outset.

Company Sale and Purchase Process: Preliminary Transaction Preparation (Stage 0)

A company sale and purchase process may be initiated in one of two ways: either the shareholders decide to market the company for sale, or a prospective purchaser approaches the company and submits an acquisition proposal. This distinction is significant, as it will shape the manner in which the transaction is approached and managed from the very beginning.

In the former case, where the shareholders elect to commence the sale process, it is advisable to undertake a Vendor Due Diligence exercise at an early stage. This enables potential liabilities and risk areas to be identified, helps prevent issues arising during the transaction and, crucially, assists in maximising the company’s value.

By contrast, where a prospective purchaser has already submitted an acquisition offer, this preliminary preparation stage is typically omitted, and the transaction proceeds directly to the subsequent phases of the sale and purchase process.

Company Sale and Purchase Process: Non-Disclosure Agreement (NDA) (Stage 1)

One of the initial steps in a company sale and purchase process is for the parties to enter into a confidentiality agreement, commonly known as a Non-Disclosure Agreement (NDA).

Pursuant to this agreement, the parties, namely the prospective purchaser and the seller, undertake not to disclose or use any confidential information to which they may have access in the course of the negotiation and assessment of the transaction.

One of the key provisions in such agreements is the definition of “Confidential Information”, as it is fundamental to clearly define the scope of the information protected and the applicable exceptions to confidentiality. The most common exceptions typically include information that is already in the public domain, becomes publicly available other than as a result of a breach of the agreement, was already in the possession of the receiving party, or is lawfully obtained from third parties.

The agreement will also typically govern matters such as the manner in which confidential information is to be handled and safeguarded, its return or destruction, the duration of the confidentiality obligations, the consequences of any breach, and the protection of the disclosing party’s intellectual and industrial property rights.

Once the NDA has been entered into, certain information relating to the target company may be disclosed to the prospective purchaser, enabling it to analyse and evaluate the transaction, as well as to negotiate the purchase price and key terms of the deal, which are then typically reflected in a Letter of Intent (LOI).

Letter of Intent (LOI) in a Company Sale and Purchase Process (Stage 2)

The LOI is a pre-contractual document under which the parties set out in writing the principal terms on which the transaction is to be structured. In other words, its purpose is to define the key commercial terms of the transaction.

Although it is often not given the weight it merits, on the basis that it is, in principle, a non-binding document, meaning that either party may withdraw from the transaction during negotiations without any obligation to proceed to completion, the reality is that negotiating a well-drafted LOI is of key importance, as it will greatly facilitate both the subsequent negotiations and the drafting of the share purchase agreement.

The most common provisions in such agreements include:

• the indicative purchase price of the transaction,
• the anticipated transaction timetable,
• the conditions required to complete the transaction,
• the exclusivity period requested by the purchaser to carry out its due diligence and negotiate the acquisition.

However, although the LOI is generally non-binding, certain provisions are binding in nature, in particular those relating to confidentiality and any restrictions on negotiating with third parties during the Due Diligence process to be conducted by the prospective purchaser.

Due Diligence in a Company Sale and Purchase Process (Stage 3)

As explained in other articles, due diligence is an investigative process undertaken by the prospective purchaser to assess the risks and opportunities inherent in the transaction.

During this stage, the purchaser and its advisers undertake a detailed review of the target company’s legal, tax, employment, financial and operational position, with the aim of identifying any potential liabilities or contingencies that may affect the value of the transaction or the decision to proceed with the acquisition.

The timeframe for conducting the Due Diligence exercise is typically agreed in advance in the LOI and, as a general rule, it usually lasts between four and eight weeks from the date on which the seller provides between 80% and 100% of the requested documentation and information in relation to the target company.

This is often the stage that gives rise to the greatest concern for sellers, as it is when the purchaser undertakes a detailed assessment of the target company’s actual position. However, as a general rule, transactions do not usually fail to proceed unless a particularly material contingency or issue is identified.

However, the purchaser will generally rely on any contingencies identified during the Due Diligence process to adjust the purchase price or seek additional warranties and protections. For this reason, and as mentioned above, where a company sale is being considered, it is often highly advantageous to undertake a Vendor Due Diligence exercise in advance.

Negotiation and Execution of the Share Purchase Agreement (SPA) (Stage 4)

Once the purchaser has completed its review and due diligence exercise in respect of the target company, the parties will proceed to negotiate and execute the share purchase agreement (SPA), which sets out the terms and conditions on which the acquisition is to be effected.

It is essential to draft and negotiate a comprehensive and precise share purchase agreement (SPA), avoiding any ambiguity or scope for interpretation, as there is no specific statutory framework governing this type of agreement under the applicable legal system.

Among the most important provisions are the representations and warranties. Under these clauses, the seller makes a series of representations regarding the target company, thereby confirming and warranting its actual legal, financial and operational position.

Signing and Notarisation in a Company Sale and Purchase Process (Stage 5)

The final stage of a company sale and purchase process is the signing and formalisation of the share purchase agreement.

As a general rule, the signing of the SPA and the formalisation of the transaction by way of the relevant deed of transfer are carried out in the same act before a notary public. However, in certain transactions, the SPA may provide for a condition precedent, such that although the agreement is signed initially, completion and formalisation of the transaction will not occur until the agreed condition has been satisfied.

Conclusion and Key Considerations in a Company Sale and Purchase Process

As can be seen, a company sale and purchase process is typically a complex process, involving multiple stages, negotiations and legal documentation that must be properly regulated and structured in order to mitigate risks and ensure legal certainty.

Although it is not mandatory to engage specialised advisers for this type of transaction, in practice it is highly advisable to do so, not only to ensure appropriate legal certainty throughout the process, but also to maximise transaction value and safeguard the interests of both the purchaser and the seller.

For this reason, Devesa has a team of highly specialised corporate and commercial law practitioners capable of advising on all key aspects of the acquisition or disposal of a company.

Frequently Asked Questions (FAQ) – Company Sale and Process

Need advice? Visit our practice area on company sale and purchase transactions:

Corporate and Company Law