How to buy or sell your business: step 4 – disclosure

How to buy or sell a business: Step 4 – disclosure

Disclosure is the process of making facts or information available to the buyer, and is the seller’s opportunity to limit their liability under the warranties (see Step 3 – the contract). In this part four of this five-part series we will look at how the seller can make a disclosure and in what form this may take.

We’re nearing the end of this five-part series, but we’re not quite done yet! You might want to remind yourself of due diligence or the contract so be sure to check out the other steps so you know what to expect when buying or selling your business:

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 4 – Dealing with disclosure

Disclosure is the action of making something known to the buyer and is the seller’s opportunity to tell the buyer of specific facts or issues which may affect the truth or accuracy of the warranties. As discussed in Step 3 – The Contract, it is one way in which the seller may seek to limit their liability under the contract.

But it is not a case of the seller dropping last minute information on the buyer. The contract will likely impose a standard or minimum requirement for the facts or information to be ‘deemed disclosed’. For example, for a matter to be disclosed it may need to be “fairly and accurately disclosed in such manner and in such detail as to enable a buyer to make a clear, informed and accurate assessment of the facts”. It is therefore important that the seller provides detailed information in a clear and logical way, often done in the form of a letter (Disclosure Letter).

Disclosure Letter

The Disclosure Letter is a letter from the seller to the buyer, which is prepared by the seller’s solicitors. It may only be two or three pages long, or as long as the contract (depending on the number of disclosures and their complexity). It may also refer to documents uploaded to a data site, or contained within a bundle, adding to the length of the Disclosure Letter and the clarity of the disclosure.

The Disclosure Letter is usually divided into two sections, 1) general disclosures, and 2) specific disclosures.

General disclosures

General disclosures will typically include information which the buyer ought to be aware of or appears on public record. For example, the general disclosures may include:

• matters which would be revealed by an inspection of the properties;
• all information and matters which would be revealed by an online search of public registers (such as, Companies House, the Intellectual Property Office or HM Land Registry); and/or
• matters shown (or specifically provided for) in the accounts of the business.

The seller will want as many broad general disclosures as possible, whereas the buyer will want few and narrow general disclosures.

Specific disclosures

Specific disclosures are those facts or information which relate to the business and one or more of the warranties. Here the seller cannot rely on the broad nature of the general disclosures, and must spend time providing detailed information to the standard set out in the contract. Each business is different, and therefore specific disclosures are bespoke.

However, the specific disclosure section may look like this:

Warranty number	Warranty	Specific disclosure
3.7	All forms, returns, particulars, resolutions, documents and information which should have been filed at the Registrar or Companies were filed within the relevant time limits.	The company’s accounts made up to [x] and due for filing by [x] were filed at the Registrar of Companies on [x].
7.2	Since the accounts date, the company has not declared, paid or made any dividend or other distribution.	Since the accounts date, £[x] has been declared and distributed as dividends.
14.1	In the 12 months prior to completion, no employee has been absent from work for any reason, including illness or ill-health, maternity or other related leave, career break or sabbatical for longer than [x] days.	Employee six went on maternity leave on [x] and is due to return on [x].

It is important to highlight that disclosure is not a fact-finding exercise and should not be used as an extension of due diligence (see Step 2 – Due Diligence). However, some of the issues discovered through due diligence may need to be disclosed.

What next?

You’re almost done – you’ve established your terms, you’ve done your due diligence, you’ve agreed a contract and you’ve dealt with disclosure. All that’s left is to complete the deal – check out part five for what to do at completion.

Contact us

If you need help 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.