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Clearing the legal hurdles

21 January 2013

I have been a corporate lawyer for nearly 15 years, and have spent a lot of that time dealing with buying and selling owner managed businesses. Deals of this sort have always presented their own challenges and hurdles, and since the start of the recession, those issues have become more pronounced - not only impacting upon how deals are done, but whether transactions of this sort actually happen or not.

All deals (whatever the type) revolve around one main discussion: price and it is those discussions which really impact on the legal process. Owners who are looking to sell are often told that they need to have realistic price expectations-that the current market now means that buyers dictate price rather than sellers. There is a lot of truth in that. Equally though, an owner with expectations above what the market is telling them, may still look for a fuller price. That is their prerogative - if you have spent years building up a business, you may choose to keep it rather than sell it, and wait until the market picks up.

If the deal is to proceed, you may look for something to bridge the gap between what a buyer is prepared to pay, and what a seller wants to receive. That may involve some deferred or contingent consideration based upon the future trading of the business. This means that a seller has the potential to realise the price they are looking for, whilst balancing the concerns of a buyer who may believe he may be overpaying for the business.

Whilst in theory this sounds straightforward, it can be a large hurdle during the legal process, as the terms relating to the payment need careful drafting. There is also the issue of security for any payments (meaning that the seller has an guarantee that the buyer will actually be able to make any payments due) and this may involve lengthy discussions with the buyers bank as well as the buyer itself.

All these discussions can take a significant amount of time, and with owner managed businesses, they usually require the focus of the key personnel as the very people running the business, now find their time taken up in discussions with their advisors, as well as the proposed buyer.

One issue which needs careful attention in the current climate is the legal due diligence exercise (the process of providing information to the buyer about the business). This part of the transaction, in particular, can take a lot of time and effort to deal with, and in recent years buyers tend to carry out more due diligence which reflects a more cautious approach to deals overall.

In recent years, we have seen a move to electronic data rooms (secure websites which allow access to this information). This helps with the flow of information and also means that those involved in the process instantly have that information available to review. This in turn helps with understanding and effectively dealing with any key issues. This part of the process can still prove difficult though as it will require a considerable amount of time spent by an owner in collating the information, as well as posing some internal confidentiality issues if the owner needs the help of the wider management team or other employees in providing it.

The final hurdle which an owner will face is the run up to completion. A lot of key points may require final negotiation, which in turn may impact upon the timetable that the parties were intending to follow. By this point, an owner is likely to have made the mental adjustment to selling and therefore, will now want the deal to complete as soon as possible. At this time, it is important that a mindset does not allow a buyer to exploit matters by seeking to impose new or more onerous terms. An owner needs to balance the preference of concluding a deal quickly, with making sure it continues to be done on the right terms.

This article was first published in Nottingham Posts The Business

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