After focusing on financial management and contingency restructuring amid the pandemic, law firms are once again looking to grow – and they are buying up smaller competitors to do so.
The most popular way of facilitating such an arrangement is via a share purchase agreement (SPA) or an asset purchase agreement (APA). While on the face of it, these may appear to be relatively simple documents to prepare, we are often called upon to advise on the repercussions where APAs have failed to capture critical assets, or in circumstances where SPAs are subsequently found to not be as initially thought.
The repercussions of such failings are significantly more complicated than the cause; the latter generally a result of simple oversight or, on occasion, sloppy drafting. We have therefore set out our top six tips for buyers and practitioners alike, when faced with the preparation of a purchase agreement.
1. Due diligence
The most fundamental part of any asset purchase is ensuring that you have properly carried out your due diligence. Skeletons lurk deep in the closet and the only way to find them is by digging around. As such, prior to purchase make sure you have: (a) reviewed the firm’s books and records for at least the past five years; (b) checked whether the firm is subject to any ongoing litigation or has any judgments against it; and (c) established that the firm is either debt-free or, if assuming liabilities, that there are no undisclosed debts. Needless to say, no one wants to purchase a seemingly successful and profitable business only to discover that it is embroiled in high-value litigation which might either result in a judgment being entered against it or at least significantly damage the firm’s reputation.
2. Know your business
No two businesses are ever the same. By understanding the mechanics of the business you are intending to purchase, you are able to properly consider what assets you might reasonably want (or not want). For example, if fewer than 4% of new customers were ‘walk-ins’, you may wish to weigh up the benefit of taking on the assignment of the office lease. This kind of critical analysis will allow you to provide clear instructions for the purpose of preparing your purchase agreement but also give you a better indication of where the value lies in the business.
3. Protect the goodwill
When buying a business, the goodwill is generally paramount. As such, well-drafted and considered restrictive covenants (including non-competition and non-dealing clauses) are essential. We emphasise the word ‘considered’ because covenants which are too onerous and/or attempt to guard more than is necessary in the circumstances will very likely be held unenforceable. Unfortunately, there are no approved parameters when it comes to restrictive covenants – each must be considered in their own right and in light of specific facts. However, a well-thought-out clause should clearly set out (as appropriate) the period of any restriction, geographical constraints, classes of individuals and permitted activities.
4. Ready, steady, complete
When buying a business, condition precedents can be your best ally. An APA should clearly set out all conditions which require resolution/compliance before a purchase can be completed. Such conditions may include clearance of the seller’s debt and transferring any banking approvals. Ensuring that such conditions are in the agreement avoids the risk of completion prior to any such conditions being met by the seller. It is also sensible to include a long stop date in the APA by which time any condition precedents must have been complied with. This may be accompanied by a provision which allows the purchaser the opportunity to withdraw from the deal if such preconditions are not met by that date – if, for example, the deal becomes untenable as a result.
5. Check your schedules
If your APA refers to a schedule, make sure it is appended to the final agreement. While this may seem like an obvious point to raise, there have been numerous occasions where the definition of ‘Client List’ is ‘as set out in Schedule 1’ and on review of Schedule 1, it is blank, effectively meaning no client list was bought. This can be a costly mistake and extremely difficult to remedy if those clients have gone elsewhere.
6. Bespoke is key
The majority of precedent APAs do contain standard clauses relating to the principal assets a buyer would reasonably want to assume. However, standard documents are almost never sufficient for purpose; they should always be adapted to the requirements of the purchase in question. For instance, while a standard APA will likely state that you will purchase the telephone systems, what is the real value if you do not also purchase the rights to the relevant telephone numbers for the business? Often these types of smaller, ancillary elements are overlooked and not expressly provided for in a purchase agreement. This can subsequently cause significant issues on a wider level.
On a practical point, as well as ensuring your respective purchase agreement is fit for purpose, there are also post-completion requirements to consider. These include assignments and novations of contracts, payment of any taxes and other charges such as SDLT and general administrative matters relating to payroll, pensions and insurance.
Purchase agreements can therefore be a minefield to navigate. As such, it is crucial to ensure you have a legal team who are not just able to draft and consider the APA at face value, but to consider the intricacies of the deal and the assets which make up the same.
Elliot Nathan and Rachel Watson are solicitors in the dispute resolution team at Debenhams Ottaway