The professional advisers acting for the vendor of a business will normally ask any serious enquirers to sign a Confidentiality Agreement before releasing detailed information about the business for sale. A Confidentiality Agreement is also known as a Non-Disclosure Agreement (NDA) or as a Confidential Disclosure Agreement or Secrecy Agreement.
The Confidentiality Agreement is a legally binding contract in which a person or business promises to treat specific information provided by the vendor as secret and not disclose it to others without proper authorisation. Information qualifies as secret or confidential when it is not in the public domain.
MBO (Management Buy Out)
When the managers / directors / senior executives of a company purchase a controlling interest in a company from the existing shareholders the transaction is called a Management Buy Out (MBO). The management in a company sometimes see opportunities to grow the profits of a business which may or may not be seen by the existing owners. The management team are willing to commit their private wealth and time to growing profits in the company and are willing to take the substantial risks involved.
In many cases the management team will raise funds from a Venture Capitalist to help them acquire the business. If the company being purchased is a public company the management team will generally buy out all the shareholders and take the company private, so that they have greater control over management of the company.
Before purchasing or making an investment in a business an investor will usually ask his/her professional advisers to carry out Due Diligence on the target business. Due Diligence is a comprehensive and detailed examination of the target business typically including an examination of the books and records, of the assets and debts, contracts with customers and suppliers, planned capital expenditure, legal matters, strategic plans etc. Environmental audits may also be carried out as part of due diligence, for example to ensure that the business being purchased will not face claims in the future for contamination etc.
The purpose of Due Diligence is to confirm that the information given by the vendor is reliable; to undercover any factors that might affect the sustainability of future profits and to give reassurance to the investor on the future prospects of the business.
When Heads of Agreement (see below) are agreed the purchasers of a business face the prospect of significant costs as they will request their professional advisers to negotiate the detailed sales contract and to carry out Due Diligence (see above). They will therefore normally ask for an agreed period of time during which the vendor will deal exclusively with them. The purchaser will want sufficient time to complete Due Diligence and to agree the Sale Contract but the vendor will wish to limit the period agreed, so that other parties can be involved again, should the current deal fall through.
Heads of Agreement
The Heads of Agreement sets out the general terms of the purchaser’s offer which the vendor has agreed to accept, subject to contract. The Heads of Agreement is usually a formal letter from the purchaser to the vendor.
The Heads of Agreement will set out key terms such as:
- The structure of the deal e.g. a sale of the shares in the company or a sale of the assets etc.
- The price to be paid and the timing of the payments
- Requirements the vendor will have to fulfil such as staying on for an agreed period to help with handing over the business.
Information Memorandum (IM)
The Information Memorandum (aka The Sales Memorandum) is a marketing document, typically produced by a vendor’s professional advisers, which gives a lot of background information about the business for sale. It will contain a brief history of the business and will contain general information about the products/services sold, the target customers, reasons for the sale, unique factors that make this business attractive and the potential for future growth of the business.
The IM will also contain:
- Key financial information for the last three years
- The proposed sale structure e.g. sale of the shares in the business or sale of the assets and goodwill
- Information on the numbers of staff / an organisation chart / locations of the business and branches etc.
MBI (Management Buy In)
An MBI is a transaction where an outside investor or management team purchases a company and replaces or supplements the existing management team in the company purchased. The outsiders may believe that the company purchased is undervalued or has been poorly managed. They, the outsiders, see opportunities for profit as a result of improved management of the company.
Venture Capitalists (VCs) seek out under-valued or poorly managed companies that can benefit from improved management and / or increased investment. Sometimes VCs identify a business sector that can be re-structured. They then buy a number of companies in the sector, amalgamate them and put new dynamic management in place.
NDA (Non Disclosure Agreement)
A Non-Disclosure Agreement (NDA), also known as a Confidentiality Agreement (see above), is a low-cost way to protect your business’ ideas.
An NDA is a legal contract between you and another party. Typically, you agree to disclose information to them for a specific purpose, while they agree not to disclose that information to anyone else. This allows you to share your trade secrets with business partners while preventing them from passing this information on.” See: www.BusinessLink.gov.uk
Similar to an Information Memorandum (see above).