How to buy a business in the UK: the 9 legal steps of a share purchase acquisition

How do you buy a business in the UK, legally? When you are buying a company through a share purchase, the legal side is arguably the most important part of the whole exercise. If it is done incorrectly, the transaction may be treated as legally invalid, which means you have spent money on something that is not actually yours. Below are the nine stages of a share purchase acquisition, in the order they happen, followed by the three things that belong in every share purchase agreement.

Heads of terms and exclusivity

• Step 1: draft and negotiate the heads of terms. This is the short document that sets out how you intend to buy the business. I would advise buyers to at least consider including an exclusivity clause, which makes you the sole potential buyer of the business for a period of time. That stops you competing with other buyers while you spend money investigating the business, and it makes the seller more committed to selling to you rather than keeping other options open. There is a fuller explanation in Heads of terms when buying a business.

Due diligence questionnaire

• Step 2: draft and send the due diligence questionnaire. This is a document listing the questions you want to ask the seller and the kinds of documents you want to see. It frames the whole investigation that follows, so it is worth getting right: a vague questionnaire produces vague answers, while specific questions about disputes, debts, contracts and staff produce documents you can actually check. See Due diligence questionnaire when buying a business for what to include.

Virtual data room

• Step 3: the seller opens a virtual data room. The seller uploads the documents you have requested to a virtual data room, or VDR. A data room is essentially an online database, broken down into folders, each containing the information you asked for in the questionnaire. The structure of the data room usually mirrors the structure of the questionnaire, which is another reason to organise the questionnaire sensibly: it makes the seller's job easier and your review faster.

Due diligence and red flags

• Step 4: conduct due diligence. You inspect and analyse the documents the seller has shared. The purpose is to identify red flags: anything that changes the risk, the price or the viability of the deal. This is the stage where you find out whether the business is what the seller has described, and it is where the money you spend on advisers earns its keep.

Once due diligence is done and you have identified any red flags, you have a choice. You can back out of the deal, or you can proceed with the purchase. If you proceed, the problems you found should be dealt with through the protections in the share purchase agreement, which is the next step. Due diligence and the SPA are two halves of the same exercise: what you discover in one determines what you need in the other.

Share purchase agreement

• Step 5: draft and negotiate the share purchase agreement. The SPA is the contract that transfers the shares from the seller to you. As the buyer you will want it to include warranties and indemnities that reflect what you learned in due diligence, and those are covered in more detail at the end of this article. There is a fuller explanation of the document itself in Share purchase agreement: what to include.

Completion documents under the Companies Act 2006

• Step 6: produce the corporate documentation. This is one of the most important steps and, strangely, one that buyers very often overlook. A share purchase has to comply with the Companies Act 2006, and that requires a set of corporate documents to be prepared. It is the buyer's responsibility to produce them.

Getting this part wrong can mean the transaction is treated as invalid, so that you are not the legal owner of the shares you have paid for. In my view this is the clearest reason to appoint qualified solicitors who specialise in acquisitions rather than trying to handle the paperwork yourself.

What is a disclosure letter?

• Step 7: negotiate the disclosure letter. The disclosure letter is a document produced by the seller. It sets out the key disclosures the seller has made to you as the buyer, typically against the warranties in the SPA. What is disclosed is what the seller is telling you about up front, and it shapes what you can later claim for, so the contents need careful negotiation. A seller will want the disclosure letter to be as wide as possible; a buyer will want it limited to specific, clearly explained matters rather than a general reference to everything in the data room.

Completing the acquisition

• Step 8: complete. Completion is the day the share purchase agreement is signed and dated, the money is sent to the seller, and all of the deal documents are signed or exchanged. At that point the shares pass to you. In practice completion is usually a coordinated exchange of signed documents and funds, with each side's solicitors confirming that everything required has been delivered before the money is released.

Post-completion steps

• Step 9: post-completion procedure. The deal is not finished when the money moves. You will need to notify Companies House of the transfer of shares, submit the relevant documents and forms, and cancel the old share certificates and issue new ones. These steps are what put the public record in line with what has happened. Until they are done, anyone searching the register will still see the seller as the shareholder, and that can cause problems with banks, customers and future investors.

What to include in a share purchase agreement

Finally, three things every buyer should make sure are in the share purchase agreement.

• The consideration mechanism. How is the purchase price calculated? Is it a fixed price, or is it based on the financial performance of the business? This needs to be spelt out precisely, particularly if any part of the price is deferred or linked to how the business performs after you own it, because any ambiguity here becomes a dispute later.
• Extensive warranties. Warranties are promises the seller makes about the state of the business on the day you buy it. The more comprehensive they are, the better protected you are against things you did not find in due diligence. If a warranty turns out to be untrue, you may have a claim against the seller for the loss it causes you.
• Indemnities. Indemnities are provisions that oblige the seller to pay you if something specific goes wrong. For example, you may have a warranty stating that the target business has paid all of its tax. If it turns out that is not the case and HMRC comes after you as the new owner, you want to be able to claim back from the seller the money you have had to pay to HMRC. An indemnity gives you that direct route to recovery.

Next steps

If you are planning a share purchase, work through the nine stages in order and do not skip the corporate documentation at step six, because that is where ownership can fall apart on a technicality. Speak to a corporate solicitor who specialises in acquisitions before you draft the heads of terms, so the exclusivity, the due diligence and the share purchase agreement are all set up to protect you from the start.