Home / The Rix & Kay Blog / How to buy or sell a business: step 1 – establishing terms
Daniel Halls

Solicitor - East Sussex (Uckfield)

10th November 2023

How to buy or sell a business: Step 1 – establishing terms

Buying or selling a business can be daunting. Where do you begin and what are the key steps? This five-part series will guide you through some of the key stages and highlight areas you may need to address when selling or buying a business, whether you’re selling/buying the business’s assets, or the company’s shares.

What to expect:

Step 1 – Establishing the terms of the deal and confidentiality

Step 2 – Due diligence

Step 3 – The Contract

Step 4 – Dealing with disclosure

Step 5 – Completion

This five-part series is not designed to be exhaustive, and not every step will be suitable for every transaction. It is therefore important to work with experienced advisers who can help guide you through each stage.

Let’s start at the beginning…

Step 1 – Establishing the terms of the deal and confidentiality

This step addresses the early stages of negotiations and the key issues that should be addressed.

Confidentiality and exclusivity

Maintaining confidentiality is often the first hurdle. If there is news of a potential sale, it could negatively impact the business – for example, suppliers, customers and employees may be uncertain about the future of the business and start exploring other options. Will the business continue trading on the same terms? Will the transaction affect the quality of the service/product? Will the management structure/style change? Confidentiality can help ease these doubts, making it a priority for both the seller and the buyer. To maintain confidentiality, you can:

  • Enter into a confidentiality agreement or non-disclosure agreement (NDA), which creates a legal obligation on the parties to keep sensitive information confidential.
  • Limit the number of people who are aware of the sale and control the flow of information being shared.
  • Work with professional advisors who are experienced with dealing with confidentiality.

Exclusivity grants the buyer the sole right to negotiate and potentially buy the business for an agreed period, and prevents the seller from negotiating or entertaining offers from other buyers – these rights/restrictions may be included within a confidentiality agreement or NDA. Exclusivity allows both parties to commit to the sale process and focus their efforts without unwanted distractions.

So, should you agree to exclusivity?

Exclusivity demonstrates commitment and can help establish mutual trust. Such provisions focus both parties’ efforts and helps set a timeline to completion. However, it is important to strike a balance. Granting exclusivity too early can hinder negotiations or prevent the right parties talking to each other. Too long an exclusivity period may take away the parties’ impetus and delay the transaction.

Heads of Terms

Heads of Terms, also known as a Term Sheet or a Memorandum of Understanding, is a non-binding agreement. It outlines the agreed terms upon which the buyer and the seller have agreed to move forward. What makes Heads of Terms important?

  • Clarity – Heads of Terms provide a framework and outline the fundamental aspects of the transaction. It can serve as a starting point for more detailed negotiation and due diligence.
  • Efficiency – Setting out the terms upfront ensures that the fundamental points are agreed before proceeding. In turn, this helps avoid unnecessary costs as less time and effort will likely be spent on minor issues.
  • Flexibility – It allows the parties to effectively create a platform for focused discussion without entering into a binding agreement. Parties get to explore various aspects of the deal and different deal structures.

Heads of Terms are not critical to the success of every deal, and sometimes it may be more efficient and effective to proceed without them, however, they do help provide a clear framework. If Heads of Terms are used then they must be prepared carefully, as parties may be reluctant to deviate from them once agreed.

What next?

After establishing your terms, and ensuring confidentiality with all involved parties, now it’s time to focus on due diligence. Be sure to check out part two to find out what diligence is due.

Contact us

If you’re looking to buy or sell a business, Daniel Halls, a solicitor in our Corporate & Commercial team, is here to help you every step of the way. Call Daniel on 01825 744435 or email him at danielhalls@rixandkay.co.uk.

For more information on how Daniel and the Corporate & Commercial team can guide you through your sale or purchase, don’t hesitate to contact us.