Asset sale and purchase: Mountains or mole-hills?
In June, a team of walkers and drivers from EMW will be taking on the National Three Peaks Challenge, climbing (and travelling between) the tallest mountains in Scotland, England and Wales in just 24 hours.
Most importantly, the team is raising money for a very worthy cause; EMW’s sponsored charity, the British Heart Foundation. However, it is also a personal challenge for each of us.
Now that the training is well underway, I’ve been reflecting on the process so far and what yet lies ahead. In total, the National Three Peaks Challenge involves around 23 miles of walking with a combined ascent of more than 3,000m and over 475 miles of driving in just one weekend; not something to be taken lightly!
Much like the sale and purchase of a business and its assets, it is a marathon, not a sprint.
First things first, you need to set your objectives and plan how you are going to achieve them. Do your research so that you know what you are embarking upon and seek more information by speaking with others who have prior experience, whether that’s your solicitor, accountant, tax adviser or a fellow ‘Three-Peaker’. Ask the right questions (even if you’re only asking yourself): is it right for you; is the timing right; can it be done efficiently (e.g. is it tax efficient); and what are the risks?
Think about what needs to happen in order to be ready. Should there, for instance, be any pre-sale reorganisation for intra-group asset transfers?
If you are keen to go ahead, then an important first step is to ensure you carry out your due diligence. This is an extensive information gathering process, based on a range of legal and financial matters to identify any potential problems at an early stage. ~This helps the potential buyer make an informed decision on whether or not to proceed before both parties have invested significant time and costs into the process.
If you are a seller, there will be a time commitment to gather and compile all the information to respond to the buyer’s enquiries (on top of your day job!). If you are a buyer, there will be a lot of information to digest and assess. It is, however, a good opportunity to spend some time on the ground; visiting the target company’s offices or sites (or, in our case, mountains), meeting with key personnel and learning first-hand what is involved in taking on the business.
Approvals and external factors
There are also external factors to consider.
- Do you need any third party consent from, say, shareholders, a landlord, an industry regulator or HM Revenue & Customs? (Will the weather permit it?)
- How will the target company’s clients, suppliers, creditors and debtors react to the sale and purchase? (Are the people around you supportive?)
- Are there any licences or insurances that need to be put in place? (Will there be car parking, heavy traffic or road works?)
An integral cornerstone of any deal will be making sure there are sufficient funds to see it through. Think about the source of funds needed to enable the buyer to pay the seller on completion and whether the buyer needs extra time to fundraise from external sources (e.g. its bank or investors).
Think about whether any of the funds will be conditional; for example, might the buyer pay deferred funds after completion if the target company hits certain milestones after completion?
For the EMW team, this means not only raising enough funds for the challenge to make a hard-won donation to a commendable cause, but also the personal costs towards equipment and subsidised food, drink and transport.
Documenting the transaction
A critical part of an asset sale and purchase is making sure the terms of the deal are properly documented in an asset purchase agreement. One vital aspect of this will likely be a detailed list of all the assets and equipment that is being sold and what is excluded from the purchase. Only the assets and liabilities that were agreed upon will be transferred, so great care must be taken to identify and define those assets and liabilities. Any assets and liabilities not properly provided for will remain with the seller.
It is also important to properly record the distribution of responsibilities and liabilities. Primarily this will be between the seller and the buyer (e.g. in the form of warranties and indemnities – that is, assurances about the state of affairs of the target company), but it can also take place between multiple sellers (e.g. will ‘director shareholders’ give greater warranties than less involved ‘investor shareholders’).
You can be sure the EMW team has an exceedingly long list of equipment and spares for the challenge, most of which will be critical to the chances of success. Who will take responsibility for radio contact, administering first aid, route planning and food preparation, not to mention documenting our progress, setting our training regime, time-keeping and photographs?
Finally, it is a matter of getting it ‘over the finish line’, which may involve the parties leaving their comfort-zones. If you are a seller, this may be stepping out of a business in which you have devoted years of time and effort towards its success. If you are a buyer, this may be stepping into a business that already has a set way of thinking or even venturing into an entirely new market. Inevitably, both parties will end up making some concessions and compromises in order to complete (but hopefully there will be no need to use the first aid kit) and the hard work will make it all worthwhile.
The National Three Peaks challenge might be (quite literally) an uphill struggle, but buying or selling the business and assets of a company doesn’t need to be. If you prepare yourself for what lies ahead, then there is no need for those mole-hills to turn in to mountains.
If you're selling or buying a business and need advice on this, contact Ross Hayward.