Buying a competitor's customer base: asset purchase structured as debt release plus deferred consideration

At a glance

Our client, a UK supplier of energy metering and industrial instrumentation, bought the customer database, goodwill, intellectual property and saleable stock of a smaller competitor that already owed its group a substantial sum. The deal was structured so that most of the price was satisfied by releasing that debt, with the balance paid in instalments. The seller chose to negotiate without solicitors, which made clarity in the drafting essential.

The client and the objective

The seller's customers were buying the same category of products the client makes, and the seller was winding down that side of its operation while keeping a separate retained business. The client wanted to absorb the customer relationships and brand into its own operation, without taking on employees, premises, book debts or the seller's corporate identity.

The deal

• Asset purchase agreement covering the customer database and records, goodwill, intellectual property and stock, with everything else expressly excluded.
• Price satisfied partly by releasing the debt the seller owed to a company in the client's group, which joined the agreement for that purpose, and partly by deferred consideration paid in instalments over the following months.
• Stock valued at cost through a joint stock-take after completion, with a defined ageing test and a dispute mechanism.
• A group company guaranteeing the deferred payments, and the seller's owner giving a personal guarantee of the seller's obligations.
• Two full rounds of negotiation; the seller's forty-odd proposed amendments were answered item by item in a single turn.

Key legal issues and how we solved them

TUPE on an asset purchase

Buying a business as a going concern can transfer its employees automatically under TUPE. The client did not want any staff. The agreement carved out employees from the assets, and the seller warranted that no employee was wholly or mainly assigned to the transferring business and gave a full indemnity for any claim that said otherwise.

Scope: buying a slice of a business, not the whole

Because the seller was keeping a retained business under the same registered name, the agreement had to define precisely what was transferring. We made the asset schedule exhaustive, added schedules listing the transferring customers, the contracts and the data to be transferred, and defined the retained business so that the restrictive covenants bit on the right activity.

Restrictive covenants with a carve-out

The seller accepted three-year non-compete and non-solicitation covenants over the transferred customers, but needed to keep using its registered name for the retained business. We drafted a carve-out allowing that limited use, together with obligations to pass any competing enquiries to the client, a commission arrangement for referrals, and a list of named competitors the seller could not deal with.

Caps, baskets and time limits

Liability for warranty claims was capped at the price, with a de minimis and a basket expressed as percentages of the price, and claim periods of two years for general warranties and seven years for tax. The indemnities, including the employment indemnity, were left uncapped.

A director on both sides of the history

One of the client's directors had, years earlier, been a major shareholder of the seller. We checked the position under the Companies Act rules on substantial property transactions and directors' conflicts, and ensured the right declaration was made and the right people approved the deal on the client's side.

Transferring customer data lawfully

The core asset was a customer database. A data transfer schedule set out what was being transferred, on what basis under UK GDPR, and what the seller had to do with its own copies afterwards.

Outcome

The agreement was signed and the business transferred in about six weeks from heads of terms, in time for the client's planned integration. The client took over the customer relationships and brand, with no employees, premises or historic liabilities, and recovered the debt it was owed as part of the price.

What this deal shows

• If the seller owes you money, a release of that debt can form part of the price and take cash off the table.
• An asset purchase lets a buyer choose what it takes, but only if the agreement defines the boundary precisely, especially when the seller carries on trading.
• TUPE does not disappear because the deal is called an asset purchase; it has to be dealt with in the document.