Process

GLOSSARY

A. Valuation: estimating the market value of a business. Different Purchasers model things differently but certain factors tend to be universal. Typical concerns include levels of growth and the business’ profitability, but thought should be given to other important factors, including the proportion of recurring revenue, total contract value, customer concentration and operational gearing. The proposed timing and structure of a transaction are also important.

B. Initial Diligence: the process of producing technical, financial and commercial evidence with which to support a valuation estimate. This process is less involved than due diligence carried about by the Purchaser (See g). It can usually be performed with just the information readily available to management.

C. Transaction Structure: We review which kind of structure is likely to support valuation whilst meeting vendors’ objectives. The most common ways of structuring business sales include earn-outs, deferred payments and participating instruments.

D. IM or Information Memorandum: A presentation describing the business for sale, including information about the business’ services, customers, financials. The document is used to solicit interest from potential acquirers and includes information that will allow them to produce an indicative valuation of their own.

E. Negotiation: Competitive sales processes require simultaneous negotiations to be held with multiple potential acquirers. Offers should be solicited and then modelled under a range of scenarios before counterproposals are developed, which allows the best offer to be identified.

F. Heads of Terms set out in detail the headline commercial terms of the proposed transactions, this will either include an exclusivity clause or come alongside a separate legally binding agreement to continue discussions with a Purchaser on an exclusive basis for a limited period.

G. Due diligence: the process the Purchaser undertakes to verify the information that has been provided to them and gain a deeper understanding of the business from a commercial, legal and financial perspective. This typically takes the form of information requests, which the Sellers respond to together with supporting documentation (placed in a virtual data room.

H. SPA or Share Purchase Agreement: The overarching agreement setting the detailed contractual terms governing the sale of the Target (based on the Heads of Terms, see f).

I. Warranties: Statements that are made by the Sellers at the request of the Purchaser stating that certain things are true about the Target (for example, that there is an absence of outstanding claims or litigation). These generally exclude forward looking statements but must be accurate. Breaches of warranties that result in the Purchaser suffering loss may result in a claim against the Sellers. 

J. Indemnities: Require the Sellers to guarantee any financial loss that the Purchaser may suffer as a result of a specific identified risks attached.

K. Disclosure(s) are made by the Sellers to the Purchaser, (generally in a “Disclosure Letter”), which discloses issues which could be a potential breach of a specific warranty in advance of Completion (see p). Disclosing potential breaches in this way allows the Sellers protection from claims brought against them by the Purchaser where they have been made aware of such issues in the Disclosure Letter.

L. Restrictive Covenants: Undertakings that the Sellers gives to the acquirer to refrain from certain activities for a given period of time. Most commonly, restrictive covenants prevent the Vendor from competing with the Target and for example, by soliciting customers or staff away from it. Restrictive covenants typically last from 18 to 36 months. 

M. Seller protections: Clauses set out in an SPA (see h) which detail what the Purchaser may or may not do post-transaction (including what information they are obliged to provide to the Sellers). These are of particular importance where a structured transaction involves the payment of deferred or contingent consideration. 

N. Capital Adjustments: Adjustments to the consideration (either up or down) paid by the Purchaser in respect of the Target reflecting the debt, cash and normalised levels of working capital of the Target at the time of completion. Capital adjustments are generally accounted for immediately prior to, or shortly after sale. 

O. Flow of Funds: Usually represented in a guide document and calculates the amount per share to be received by each of the Target’s shareholders, net of disbursements, share options schemes and any escrow.

P. Completion: The legal completion of the sale of the shares in the Target. This is typically conducted remotely and involves exchange of agreed form documents, an undertaking or transfer of funds to the Sellers’s solicitors and payment to shareholders thereafter (see o).