It’s not hard to find examples of corporate transactions in the profession. CVS Group, for example, has been very active in acquiring Masefield Veterinary Centre in September 2023, Liverpool Vets in October 2023 and Fernside Veterinary Centre in November 2023.
There are, of course, others doing the same. But for those new to the process, what does it involve?
In overview, mergers and acquisitions (M&A) refers to transactions between two companies that combine in some form. Although mergers and acquisitions are used interchangeably, they have different legal meanings. In a merger, two companies of similar size combine to form a new single entity. On the other hand, an acquisition is when a larger company acquires a smaller company, thereby absorbing the business of the smaller firm.
M&A deals can be friendly or hostile, depending on the approval of the target company’s board.
Deals done
Activity in this area hit a high in 2021 but slowed in 2022 and again in 2023, according to a February 2024 note from PwC. It said: “The UK saw 3,628 deals across 2023, compared to 4,362 the previous year, a 17 percent decline, almost triple the rate of decline in global deals volumes of 6 percent over the same period. Further analysis shows a drop in deal volume during the second half of 2023 (H2 2023) of almost 600 deals compared to the first half of the year (H1 2023). The volume of activity seen in H2 2023 is the second lowest in the last five years, next to the first half of 2020, which was affected by a slump in dealmaking early in the pandemic.
“There was a total of £46 billion worth of UK deals in H2 2023 compared to £42 billion in H1, bringing the total deal value for the year to £88 billion. However, total deal value in 2023 was down 41 percent compared to almost £150 billion worth of deals seen in 2022.”
Nevertheless, the figures involve some large numbers and activity in this area is still worthy of consideration.
The goal is to achieve a clean exit from a business. But some may wish to stay on and become a part-owner of a bigger business that makes the acquisition
Paul Taylor, a partner in the corporate department of Fox Williams, is of the view that success depends on understanding what an M&A seeks to achieve. For many, he says, “the goal is to achieve a clean exit from a business. But some may wish to stay on and become a part-owner of a bigger business that makes the acquisition.”
Deciding on the goals at the outset and communicating these to a potential buyer upfront makes it more likely that the desired outcome will be achieved.
Considerations
Many sales take the form of a share sale rather than an asset sale. In essence, the former transfers ownership interests in the company, whereas the latter means the sale of assets and business to another company.
Taylor says, “There are benefits and drawbacks to each, but a key driver is tax. A share sale may give rise to capital gains tax on the profits made. An asset sale will result in corporation tax on the proceeds of the sale made by the company. Once the company has paid the corporation tax, the proceeds of the sale can then be distributed, but if the owners are individuals, they will be charged income tax on the proceeds.” In effect, there can be double taxation on an asset sale, which is why share sales are preferred.
There can be double taxation on an asset sale, which is why share sales are preferred
An issue for private limited companies is that they have no open market for their shares, making it difficult to determine a valuation – at least not without external advisers. Here Taylor recommends that “a valuation is obtained from a reputable corporate finance adviser early on in the process”. He continues by explaining that there are options for sellers: “With a locked box, the price is locked on a particular date, and any leakage out of the company to the sellers and connected persons from then is owed to the buyer. But with completion accounts, the price is subject to adjustment once accounts have been prepared and finalised following the completion date to reflect the true position at the date that the buyer acquired the company.” Taylor sees a locked box as preferable for sellers.
Regardless of the route, key terms important to the seller should, says Taylor, be documented by way of a letter of intent or heads of terms. He says, “While such a document generally won’t be legally binding (save for certain specified provisions such as confidentiality), it will record that the parties agreed to proceed with the deal on the basis of the terms.” In other words, the document makes it much harder for the buyer or its lawyers to argue about the basis of the sale when the official documentation is drafted.
Naturally, the payment takes centre stage in any transaction. Those looking to make a clean exit will likely be looking for the buyer to make a single cash payment upon completion. However, as Taylor has seen, those intending or required to remain with the business following completion may see the buyer suggest a different consideration structure, such as an earn-out.
He’s often seen provisions that link a target – say, profit or revenue – to the price that is payable at a future date, and there are myriad other potential consideration structures that may be proposed, depending on the motivations and finances of the buyer. One example he comes across in private equity transactions is where the buyer expects sellers to stay on with the business and must reinvest a portion of their proceeds into shares or loan notes within the buyer’s organisation.
Often, there are obstacles to be overcome, such as significant issues that will be uncovered by, or revealed to, the buyer via the diligence and/or disclosure processes. Buyers will need these to be resolved ahead of completion.
Even so, Taylor advises that in all cases sellers should communicate potential issues to their advisers at the outset of the process, and consider together at what stage to make these known to the buyer and how best to handle them at that time.
Managing the process
The M&A process takes time because buyers want to conduct due diligence; as Taylor highlights, the timing of this exercise will depend on the buyer’s level of urgency, the amount of information to review and the materiality thresholds the buyer might have set for such review.
Another consideration for Taylor is the high likelihood of the need to give warranties in the sale documentation relating to the company and its business operations, against which the seller can disclose any untrue or misleading information to limit their liability.
It should be said that due diligence does open up a company’s innermost secrets. It also risks the public, customers or suppliers learning of the deal before completion. On top of this, there are worries if the potential buyer is a competitor and/or within the same line of business.
Due diligence does open up a company’s innermost secrets. It also risks the public, customers or suppliers learning of the deal before completion
It’s because of these risks that Taylor recommends that sellers enter into a confidentiality or non-disclosure agreement at the outset to provide some comfort that potential buyers will keep the information they learn during the deal process, and the existence of the potential deal itself, confidential. That said, there are other ways to protect sensitive information that is disclosed during the transaction; two options that Taylor mentions are to only upload data once it has been established that the buyer is sufficiently serious about the deal and to apply permissions to documents so that they cannot be printed or downloaded.
Personal tax implications
Lastly, while proceeds from a share sale should be taxed as capital gains, with the rate depending on whether the individual is a basic-, higher- or additional-rate taxpayer and whether they have made any other capital gains within the same tax year, there is also the business asset disposal relief (BADR), formerly known as entrepreneurs’ relief, to consider.
Taylor puts great store in BADR since it currently entitles the individual to a 10 percent tax rate rather than the otherwise applicable capital gains tax rate. He adds that, broadly speaking, this relief should also be available on asset sales and share sales but there are various qualifying conditions; he recommends taking advice from a tax advisor before structuring the sale transaction.
Summary
Those seriously considering selling their business should instruct lawyers and any other advisers as early as possible. They will need corporate finance advisers and accountants as well as lawyers; their early involvement will maximise the chances of achieving the desired outcome.
