Share purchase agreements

A share purchase agreement (SPA) is the contract under which the shares in a company are sold. If you’re selling your company, as opposed to just its assets, it’s the document which sets out how much you’re paid and when, and how much of it you could be asked to pay back.

I draft and negotiate SPAs for sellers and buyers of owner-managed companies, usually on deals worth between £250,000 and £10m, and I’ve done a lot of them over the last 18 years.

On a share sale the company itself doesn’t change, so it keeps the same name, contracts, staff, bank account and liabilities (including any that nobody knows about yet), and what changes is who owns it. That’s why the SPA is a long document, as the buyer is taking on the company’s whole history and wants promises from you about it.

The alternative is an asset sale, where the buyer picks the assets it wants and leaves the company behind, under an asset purchase agreement. If you’re not sure which you’re doing, the heads of terms should say.

How the price is paid

The price is rarely a single figure paid on one day. Often part of it is deferred, paid in instalments or tied to how the business performs after you’ve gone (an earn-out), and sometimes it’s paid in loan notes. If you’re the seller, anything which isn’t paid at completion is a debt owed to you by someone who now controls the business, so the SPA needs to deal with security, guarantees and what happens if a payment is missed. I’ve written about the risks of deferred payments.

The price is also usually adjusted, as most deals are priced on a cash free, debt free basis with a normal level of working capital, and the SPA has to say how that’s measured, which is either by completion accounts drawn up after completion or by fixing the figures at an earlier date (a locked box). Arguments about completion accounts are common, and they usually come down to how carefully the definitions were written.

Warranties, the disclosure letter and indemnities

Warranties are statements you make about the company, such as that the accounts are accurate, the tax has been paid, the contracts are in force and nobody is suing it, and there will be dozens of pages of them. If one turns out to be untrue and the buyer loses money as a result, the buyer can claim against you.

No buyer will accept a seller who refuses to give warranties, so the way you protect yourself is through the disclosure letter, which sets out the specific ways in which the warranties aren’t true. There’s more on all of this on my page about warranties and indemnities. Anything which has been properly disclosed can’t generally be the subject of a warranty claim later, which makes the disclosure letter the seller’s main protection, and it shouldn’t be left until the last week.

Indemnities are stronger than warranties, in that where a specific problem is already known about (an HMRC enquiry or a dispute with a customer, for example), the buyer will ask you to cover the cost pound for pound if it happens. There will also be a tax covenant, which appears in nearly every SPA and under which, in broad terms, you agree to pay any tax the company turns out to owe for the period before completion that wasn’t provided for in the accounts. Sellers often skim the tax covenant, but it’s worth reading carefully.

Limits on what the buyer can claim

The limitations on claims are an important part of the negotiation if you’re the seller. They normally include a time limit for bringing warranty claims (which is longer for tax), a minimum amount below which small claims don’t count, a threshold which the total has to reach before any claim can be made, and an overall cap, which is often the price itself or a proportion of it. Where each of those ends up is a matter for negotiation and depends on the deal.

The limits won’t protect you in every case, as they don’t survive fraud or dishonest concealment, which is another reason to take disclosure seriously.

Restrictive covenants

A buyer who is paying for goodwill will want you to agree not to compete, not to approach customers and not to poach staff for a period after completion. The courts are more willing to enforce restrictions given on a sale than those in an employment contract, but they still have to be reasonable in length, area and scope. If the restrictions go too far there’s a risk that they won’t be enforced at all, which is a problem for the buyer, whereas restrictions which are very wide but still enforceable are a problem for you.

Acting for buyers

I act for buyers as well as sellers, and a buyer will want the opposite on most of the points above, which means wide warranties, long time limits, a retention held back from the price and specific rather than general disclosures, and I run the buyer’s due diligence as well. Acting for both sides means I understand what the other side’s solicitor will be pushing for, which helps in getting a deal done efficiently.

How long it takes and what it costs

A sale usually takes two to three months, although it can take longer. The SPA is drafted and negotiated during that time, alongside due diligence, and it’s normally the buyer’s solicitor who produces the first draft.

I work on fixed fees, with a written scope of work agreed before I start. The fee depends on the size of the deal and how much work is involved. On a sale or purchase between £500,000 and £5m it’s usually between about 1% and 3% of the price, and the percentage falls as the deal gets bigger. Most full sales and purchases start at around £10,000 plus VAT. Franchise resales, client bank deals and most management buy-outs usually cost less, as there’s less to negotiate. Property work, warranty and indemnity insurance, escrow arrangements and anything under non-English law are outside the standard scope and are quoted separately.

Next steps

If you need a share purchase agreement drafted, reviewed or negotiated, get in touch and send me the heads of terms, the draft SPA if there is one and the company’s name or number. I’ll come back to you with a fixed fee.