What is an SPA? 

In this video we talk about Share Purchase Agreements and what they mean for each of the parties involved in the transaction. 

Watch the video below

As always, any questions please email us at info@theexitadvisor.co.uk

https://www.youtube.com/watch?v=O5dL4vQgHj0

Transcription below:

Share Purchase Agreement (SPA) Webinar Transcription

Welcome back to the next webinar in our M&A miniseries. Today, we are focusing on the Share Purchase Agreement (SPA). We'll discuss what an SPA is, the differences between the buyer's and seller's perspectives, and some key takeaways and best practices.

What is an SPA?

A Share Purchase Agreement is a legally binding document that outlines the terms and conditions for the transfer of shares. It likely covers not only the transfer of shares but also assets, property, staff conditions, customers, suppliers, and more. The purpose is to provide clarity for both parties on what is being sold and what is not. For example, the seller might retain some assets or part of the business while transferring the rest to the buyer. It also offers protection to both parties in various forms and includes provisions for handling and mediating disputes if they arise.

Buyer's Perspective

From the buyer's perspective, a core element of the SPA is due diligence. If you've watched our other webinars, you'll understand that due diligence involves accessing all the information provided by the seller, including financials, assets, staff, customers, suppliers, litigations, taxes, and everything within the business. This process helps the buyer mitigate risk by ensuring they've checked everything off their due diligence questionnaire.

Warranties and representations made by the seller provide comfort to the buyer, underwriting the information provided. An SPA includes a disclosures section where the seller informs the buyer of any ongoing issues, such as litigation, a customer reneging on a payment, or a broken supply contract. These warranties extend beyond disclosures, offering longer-term assurance that the seller stands by their statements during due diligence. Remedies for breaches of warranty and representation, which are not just financial, will be covered later.

Due diligence and SPA drafting typically run concurrently. This fact-finding process allows the buyer to potentially adjust the purchase price if the business is represented differently than expected. Conditions precedent are also crucial, including common conditions and specific ones, such as the deal closing contingent on regulatory approval or specific financing conditions.

The benefits for the buyer include minimizing surprises through thorough due diligence and a well-drafted SPA, which reduces risk and provides comfort for moving forward with the transaction. It also offers legal recourse if the seller misrepresents the business. However, risks include overly restrictive covenants that may limit deal flexibility and aggressive negotiations that could increase solicitor costs.

Seller's Perspective

From the seller's perspective, the SPA clarifies the sale terms: what exactly is being sold? This could involve a carveout, a complete sale, all assets, all shares, stock, or inventory. A good solicitor ensures the seller isn't exposed to unnecessary risks and clarifies what is and isn't being sold. This is simpler if the entire business is sold, as everything falls under the agreement.

The SPA also ensures payment terms are discussed, which may include earnouts or retention periods. A skilled lawyer will negotiate these in the seller's favor. The seller is liable for statements made in the SPA, with potential recourse from the buyer if declarations are untrue. The SPA caps liability for breaches, includes time limits on claims and retention periods, and typically contains a non-compete clause, often lasting three to five years, to prevent the seller from starting a similar business immediately after the sale.

Representations involve disclosing known issues, such as litigation or a key customer parting ways. These disclosures don't always lead to price adjustments but must be transparent to avoid issues during or after the sale. Communication is critical, as hiding problems can lead to difficulties in litigation if misrepresentations are discovered.

The benefits for the seller include locking in the sale price, which the buyer is contractually obligated to pay, and achieving a clean exit by selling shares, which is often more tax-efficient (consult a tax advisor). Risks include extensive disclosures revealing business weaknesses, potentially causing price reductions or deal failure, and disputes over earnouts if performance targets aren't met.

Key Takeaways and Best Practices

The primary takeaway is to hire a competent lawyer, as this is a critical part of the process. Most people sell a business only once, and skimping on legal fees could cost significantly if issues arise. Common clauses in an SPA cover dispute resolution, arbitration, mediation, and governing law, with a good solicitor knowing which to include or exclude for your benefit.

Timelines vary depending on the buyer, seller, and their solicitors' competence, but a holistic process, including due diligence and SPA drafting, typically takes around three months. Open communication between parties is essential to reduce timelines and address problems as they arise.

For buyers, focus on thorough due diligence to ensure the business is as expected, communicate issues to resolve them amicably, and include strong indemnities and warranties in the SPA. For sellers, communicate any issues found during due diligence, negotiate a cap on liability, aim for a reasonable non-compete clause, and ensure clear representations of known issues.

An effective SPA reduces risk for both parties, fosters trust, and facilitates a fair deal. A business sale doesn't have to be a zero-sum game; it can be a win-win. Be open-minded, know which points are non-negotiable, and be prepared to compromise, as every SPA term will be scrutinized multiple times. If the other party acts inconsistently with initial negotiations, it may signal future issues, and pulling out may be better than a bad deal.

Thanks for watching and listening. If you have any questions, please reach out at www.theexitadvisor.co.uk or connect with us on LinkedIn.