Legal documents in a business sale
Legal documents when selling a company
There are a numerous legal documents involved in a business sale. It is particularly important that the legal documents are well drafted when you sell your company. Our M&A associates are well suited to help you construct these contracts to protect your interests. Our associate members (in this case the legal advisers) are specialists in the specific legal stages of the M&A process and we get them involved when legal documents need to be produced. Below, is an overview of some of the most important legal documents that are used in a business sale.
If you are really interested in selling your company, it is good to become familiar with the documents involved. Download the following documents to become more aware of their content:
NDA (non-disclosure agreement)
The first legal document that is most often signed, is an NDA. This is a non-disclosure agreement to ensure all information you provide to a potential buyer is kept confidential. If this buyer is a potential competitor, you should be careful with the data you provide. This NDA is normally signed by a potential buyer and a seller. CFIE has a standard NDA template we work with. Different names of documents we see to guarantee confidentiality are a CDA (confidentiality disclosure agreement) or just a CA (confidentiality agreement).
Engagement (mandate) letter
The engagement letter regulates the agreement between the seller, the client, and the adviser. In this agreement, the fee structure (commitment and success fee) is described as well as other important items like exclusivity for the project. Once the mandate letter is signed, the project (the business sale) can be started. After the signing, we start the actual work of the business sale.
The letter of intent (LOI) or term sheet
An LOI (letter of intent) is a legal document that expresses the intent of the seller and buyer to work towards a transaction. In this transaction, the shares or assets of an existing business are passed on by the seller. An LOI can be legally binding or non-binding based upon what both parties agree. We suggest that the seller makes the LOI binding, so there is much more commitment from the buyer. The LOI describes the main points of the planned business sale with significant detail. The LOI is normally established after various meetings have been held and detailed information has been exchanged, but before the due diligence phase has started. The items agreed upon in the LOI are later incorporated into the SPA (share purchase agreement), so it is important to have a clear and well-documented LOI. Download an example of an LOI to see the content of this legal document.
In the case of a smaller business sale, we put together a one-page document which is called a term sheet. A term sheet highlights the main items of a planned transaction so both parties have a mutual understanding of the framework for the contract. By working with a term sheet, we try to keep the deal structure simple. It is the obligation of the buyer to prepare the term sheet, but the items should obviously be prepared and agreed upon by both the seller and the buyer. Download an example of a Term Sheet.
SPA (share purchase agreement); the contract to sell the company
In the final step of selling a business, the SPA (share purchase agreement) will be drawn up by a legal party. The responsibility belongs to the buyer and the legal advisers of the buyer. The share purchase agreement is the contract that legally executes the sale of the shares. The SPA contains all relevant legal items in relation to a business sale. The most important ones are the sale of shares, the price, withheld amount, taxes and other conditions of the business sale. Further items that are included in an SPA are warranties, the liability of the sellers and indemnities. It is important to get good advice from legal advisers on how to structure crucial items like a possible earn-out and potential warranties or indemnities. In a later phase (sometimes years after the business sale) these legal items might come back again and at that stage, you should be well protected.
Corporate Finance in Europe can manage this process if desired. Signing the contract with the notary so it is legally binding is the last step in selling your company. Download an example of an index of an SPA to see which items should be included in the agreement.
Shareholders’ agreement; an agreement between the shareholders
A shareholders’ agreement is an agreement between the different shareholders. Shareholders’ agreements can vary between different countries. Hence, it is important to use the right support of legal M&A experts in the relevant country. A shareholders’ agreement normally regulates matters like the ownership and voting rights of the shares in the company. This can include lock-down provisions, restrictions on transferring shares, or granting security interests over shares as well as “tag-along” and “drag-along” rights. The objective of these agreements is to ensure that no unexpected issues with shares can happen or that shares can be sold without the main shareholder desiring this.
European legal M&A support
We provide our M&A services in all European countries. We can help you with legal support when you want to sell your company. Corporate Finance in Europe (CFIE) is highly qualified to help out with legal M&A advice. Find your legal adviser on the page associate members if you have a legal issue concerning the sale of your company.
Please contact us for a free-of-charge brainstorming session and feedback on your plans to sell a company and the legal components involved in these processes. We can also help you with the preparation, visit how to prepare for selling a business for details.