April 26, 2021

Selling Your Business (3) – the Sale and Purchase Agreement

Many business-owners look to sell at some point. The reasons for selling may vary but often it is the opportunity for the owner to capitalize on the years of hard work that have gone into building up his or her business.
 
Poland has been constantly progressing ever since the fall of the communist regime in 1989. The country successfully managed to catch up with other competitive countries in the EU and has now become a country preferred by foreign investors. Many Polish small and medium enterprises have grown during the last 30 year and now the Polish business-owners look for opportunities to sell their businesses and look forward to receiving the offers from potential buyers.
 
There are many ways of managing a sale process from the perspective of a business-owner. The most common scenario for SMEs is signing the letter of intent, carrying out the due diligence analysis and signing the sale and purchase agreement. This is the traditional model.
 
While due diligence is progressing, the parties start working on the detailed documents of which the sale and purchase agreement (SPA) will be key. This will set out the definitive terms of the purchase and include all the protections sought by the buyer to safeguard its investment. The SPA will include the following:
 
a. The price and all payment terms – where the deal includes an earn-out element, the SPA will also include the formula for arriving at earn-out payment – usually a multiple based on average profits over three to five year period. The definition of profits for these purposes will usually be very detailed and will include numerous adjustments to the reported figures in the statutory accounts. 
 
b. Any price adjustment mechanisms agreed – buyers typically require the business to be left with sufficient working capital in order to be self-funding when it takes the business over. As the level of working capital will fluctuate on a daily basis, it is quite common for the SPA to provide for accounts to be drawn up after completion based on the position as at the completion date (known as completion accounts) and for the price to be adjusted retrospectively, depending on whether the working capital shown in the completions accounts is above or below a pre-agreed target figure. 
 
c. Warranties and indemnities – warranties are a series of statements by the sellers about the condition of the business at the date of sale. If these turn out to be untrue, the buyer has a means of redress by way of a claim for breach of warranty. These will cover everything from the accuracy of the accounts used by the buyer to value the business to the absence of disputes with staff and relationships with customers. 
 
Because the warranties are so extensive it is often the case that they will not be all true. This does not mean that the warranties cannot be given, just that the seller must make disclosures, so that the buyer is aware of the true position before completion. Before the SPA is signed, the seller should prepare a list of all the areas where the warranties do not accurately describe the business in a letter known as the disclosure letter. This is delivered to the buyer on signing of the SPA. To the extent of the disclosures, the buyer will not be able to claim breach of warranty. The more comprehensive the disclosures are, the less risk there will be of the buyer making a warranty claim after the deal has been completed.
 
An indemnity is an undertaking by the seller that it will meet a specific potential liability which has been identified by the buyer and which the buyer is particularly concerned about.
 
A buyer and sellers may wish to add other deal documents such as loan notes or shareholders’ agreement if the sale is proceeding by way of a partial sale so that for a period of time both the sellers and the buyer will be shareholders in the company.

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