Home / The Rix & Kay Blog / How to buy or sell a business: step 3 – the contract
Daniel Halls

Solicitor - East Sussex (Uckfield)

23rd November 2023

How to buy or sell a business: Step 3 – the contract

The sale and purchase contract is absolutely vital when buying or selling a business. It sets out the terms of the deal in the form of a legally-binding document that both parties must adhere to. Part three of this five-part series will guide you through some of the key parts of a contract, and why they’re important.

But this is a five-part series, so we’re taking you from start to finish of buying or selling a business. Be sure to check out the other steps to make sure you know 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

Step 3 – The Contract

The type of contract will depend on whether you’re selling/buying the business’s assets (which could be the whole business as a going concern), or the company’s shares. The contract will often be referred to as an Asset Purchase Agreement (APA) (in the case of assets) or a Share Purchase Agreement (SPA) (in the case of shares). Both are legally-binding documents that outline the terms and conditions of the sale and purchase. Whilst the documents are by definition different, they will each deal with some essential points, such as the transfer of ownership, payment of the consideration and forms of buyer protection (warranties and indemnities).

Transfer of ownership

In an asset sale, the APA specifies which assets and liabilities are being transferred. These can include tangible assets (such as property, machines and stock) and intangible assets (such as goodwill and intellectual property).

In a share sale, the SPA outlines the transfer of shares from the seller to the buyer. When acquiring all the shares of a company, the buyer purchases the entire entity, which will include all assets, liabilities and obligations, whether the seller (or buyer) is aware of them or not.

Consideration

Consideration is the price paid by the buyer to the seller. It can take various forms depending on the deal structure (the structure having been set out in the Heads of Terms: see “Step 1 – Establishing the terms of the deal and confidentiality). The contract will set out the amount, form and timing of payment(s), and whether or not the consideration is subject to any adjustment.

Warranties and indemnities

Warranties and indemnities are forms of contractual protection to apportion risk and liability between a seller and a buyer. So, what are they and how do they differ?

  • Warranties – are assurances (or statements of truth) about the business made by a seller to the buyer – these may include matters such as ownership, financial performance, accounts, employment, disputes and litigation, property and tax. They are given at the time of exchange of contracts (and possibly also at completion, if there is any sort of time lapse between the two occurrences), and often survive for a specified period of time. If a warranty is proven to have been untrue at the time it was given, then the buyer may have grounds to seek from the seller compensation for any loss it suffers, in the form of damages. As a result, the warranty schedule (which in some cases is longer than the body of the contract) can be the basis for significant negotiation between the parties. Where a warranty may be untrue or misleading, a seller may ‘disclose’ known issues or risks to the buyer in order to limit their liability, which we will discuss in Step 4 – Dealing with disclosure. (There are also many other ways in which a seller can seek to limit its potential liability coming out of warranties and your legal team will be well versed in those when you come to negotiate your contract.)
  • Indemnities – are promises by the seller to the buyer to be responsible for certain known risks or liabilities associated with the business. Effectively, the seller agrees “to make good a loss”, usually on a pound for pound basis. As indemnities are for various reasons more onerous for a seller than warranties, they usually are limited in number and deal with specific issues that concern the buyer, which have often been identified through due diligence (see Step 2 – Due diligence) or disclosure (Step 4 – Dealing with disclosure).Unlike with warranties, a seller cannot usually ‘disclose’ known issues or risks to the buyer in order to limit their liability under indemnities. However, indemnities may still be subject to specific conditions, such as a specified time period or – crucially – a financial cap.

What’s next?

The contract is almost agreed, you’re working towards completion, what else is there? Now it is time to discuss disclosure, so check out part four to find out what you need to know about disclosure when buying or selling a business.

Contact us

If you need support buying or selling 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.