Q&A: Buying & Selling a Company

A comprehensive legal resource for business owners, directors and investors 

Mergers, Acquisitions and Business Sales — what every buyer and seller needs to know 

Q. What is the difference between a share sale and an asset sale? 

This is one of the most fundamental questions in any business acquisition and the answer has significant tax, legal and commercial consequences for both parties. 

In a share sale, the buyer acquires the shares in the target company. The company itself — with all its assets, liabilities, contracts, employees and history — continues to exist under new ownership. The buyer steps into the seller’s shoes as shareholder. Because the company is unchanged, all existing contracts, licences, leases and regulatory approvals typically transfer automatically. 

In an asset sale, the buyer acquires specific assets of the business — its goodwill, equipment, stock, intellectual property, customer contracts and so on — but does not buy the company itself. The buyer creates a clean break, taking only what it wants and leaving behind unwanted liabilities. However, contracts, licences and leases must each be individually novated or assigned, and employees transfer under TUPE (the Transfer of Undertakings (Protection of Employment) Regulations 2006). 

The key differences in practice: 

• Sellers generally prefer a share sale — it is cleaner, capital gains tax rates may be lower, and Entrepreneurs’ Relief (now Business Asset Disposal Relief) may apply. 

• Buyers often prefer an asset sale — they can cherry-pick assets and leave historic liabilities (such as tax disputes or employment claims) behind. 

• Third-party consents are generally not required in a share sale but may be needed in an asset sale where contracts contain change of control or assignment restrictions. 

• SDLT (Stamp Duty Land Tax) applies on land transfers in an asset sale; stamp duty at 0.5% applies on shares in a share sale. 

Q. What is the typical process for selling a company in England and Wales? 

The sale of a private company in England and Wales typically follows a broadly consistent process, though the timeline and complexity will vary significantly depending on the size of the business, the number of parties involved and whether the deal is a negotiated sale or a competitive auction. 

The principal stages are: 

• Preparation: The seller prepares the business for sale — organising financial information, instructing solicitors and (usually) a corporate finance adviser or broker, and preparing an information memorandum for prospective buyers. 

• Marketing and buyer identification: The business is presented to prospective buyers, either through a targeted approach or a wider auction process. Non-disclosure agreements are signed before detailed information is shared. 

• Heads of terms: Once a preferred buyer is identified, the parties agree a set of heads of terms — a non-binding summary of the key commercial parameters of the deal (price, structure, timetable, exclusivity). 

• Due diligence: The buyer investigates the target company thoroughly — reviewing financials, contracts, employment arrangements, property, IP, tax position, regulatory compliance and litigation history. Due diligence typically takes four to eight weeks for a mid-market transaction. 

• Negotiation and documentation: While due diligence is ongoing, solicitors draft and negotiate the share purchase agreement, disclosure letter, and any ancillary documents (tax covenant, board minutes, service agreements, restrictive covenant deeds). 

• Exchange and completion: The SPA is signed and, simultaneously or on a later date, the shares are transferred and the consideration is paid. Post-completion adjustments (such as completion accounts or working capital adjustments) may follow. 

A straightforward transaction typically takes three to six months from heads of terms to completion. Complex multi-party transactions or those requiring regulatory approvals can take considerably longer. 

Q. What is due diligence, and why does it matter? 

Due diligence is the process by which a buyer investigates the target company before committing to a purchase. It is the buyer’s primary opportunity to understand what it is acquiring — and to identify risks, liabilities and issues that might affect either the price or the structure of the transaction. 

Legal due diligence typically covers: 

• Corporate structure — reviewing the company’s constitutional documents, share register, and group structure. 

• Contracts — examining material customer, supplier and third-party contracts for change of control provisions, termination rights and unusual obligations. 

• Employment — reviewing employment contracts, bonus schemes, pension arrangements and any employment disputes or tribunal claims. 

• Property — examining leases, freehold titles, and any planning or environmental issues. 

• Intellectual property — verifying ownership of key IP, trade marks, domain names and software licences. 

• Tax — reviewing the company’s tax history, compliance record and any open enquiries with HMRC. 

• Litigation — identifying any current or threatened legal proceedings. 

Due diligence findings inform the warranty and indemnity negotiations in the SPA. Matters that are identified and disclosed by the seller may qualify the warranties, meaning the buyer accepts the risk of those matters. Issues that are not disclosed but later come to light may give rise to a warranty claim. 

A thorough due diligence process is essential for buyers. Skimping on due diligence — particularly in a competitive process — can result in acquiring liabilities that were not anticipated and that the buyer has no contractual recourse to recover. 

Q. What are heads of terms and are they legally binding? 

Heads of terms (also called a letter of intent or memorandum of understanding) are a written summary of the key commercial terms that the parties have agreed in principle before the formal legal documentation is drafted. They typically cover the price, payment structure, the identity of the seller and buyer, any deferred or contingent consideration, conditions to completion, and the proposed timetable. 

In English law, heads of terms are generally not legally binding as to the principal commercial deal — they are a record of where the parties have got to, not a contract of sale. However, specific provisions within the heads of terms are often expressed to be legally binding, including: 

• Exclusivity — the seller’s agreement not to approach other buyers for a defined period. 

• Confidentiality — mutual obligations to keep the terms of the proposed deal confidential. 

• Costs — an agreement that each party bears its own costs (or, in some cases, that the buyer pays a break fee if it withdraws). 

The fact that heads of terms are largely non-binding does not mean they are unimportant. In practice, the commercial terms agreed at heads of terms stage are very difficult to re-open during the legal process without significant goodwill cost. It is therefore essential that both parties take legal advice before signing heads of terms, not after. 

Q. What is an earn-out and when is it used? 

An earn-out is a deferred consideration mechanism by which part of the purchase price for a business is contingent on the future financial performance of the acquired company after completion. Rather than paying the full price on day one, the buyer agrees to pay additional consideration if agreed revenue, profit or other performance targets are met over a defined period (typically one to three years post-completion). 

Earn-outs are commonly used when: 

• There is a valuation gap — the seller values the business at a higher level than the buyer is willing to pay on day one, and the earn-out bridges the difference. 

• The business is growing rapidly — an earn-out allows the seller to benefit from the upside they anticipated but the buyer was unwilling to pay for upfront. 

• Key person risk is high — if the business value depends heavily on the founding management team, an earn-out incentivises them to remain and perform post-completion. 

Earn-outs can be a source of significant dispute post-completion. Common areas of conflict include how the earn-out metrics are calculated, whether the buyer has operated the business in a way that artificially suppressed performance, and what accounting policies apply. Careful, detailed drafting of the earn-out mechanics — and specific protections for the seller regarding how the business is managed during the earn-out period — is essential.