This year alone Printweek has highlighted at least 16 instances involving two Claverley Group subsidiaries (January), DS Smith and Mondi (February), News UK and DMG (March), Smurfit Kappa and Westrock (April), and Sonoco and Eviosys (June).

There are, of course, others doing the same. But for those new to the process, what does it involve?

In summary, M&A involves transactions where two companies combine in some form. Though often used interchangeably, mergers and acquisitions have distinct legal definitions. A merger occurs when two companies of similar size join to create a new single entity. An acquisition happens when a, typically larger, company takes over a smaller one, absorbing the smaller firm.

Andrew Kavanagh, a partner and member of the Corporate & Commercial team at Bishop & Sewell, reckons that there’s “a certain mystique around M&A in the UK, and the term is something of a misnomer when applied to our corporate law”. He tells how ‘M&A’ is, in essence, an imported acronym from the US where it covers the process of buying and/or selling a business or its assets. He contrasts that with the meaning on this side of the Atlantic: “In the UK, we generally focus on acquisitions where one distinct legal entity undertakes to purchase another. In the US, mergers are also common, where two entities combine into a single new entity.”

M&A deals can be either friendly or hostile, based on whether the target company’s board approves the transaction.

Deals done

M&A activity is big business. IFLR, an online publication that covers financial regulation, M&A, ESG and related areas, noted in March 2024 that despite headwinds of “steadily rising interest rates, inflationary pressures, geopolitical uncertainty, and regulatory actions” that saw deals drop in volume, there were nevertheless many transactions that did complete. These deals were valued at £109bn in 2023, albeit down significantly from £191bn in 2022.

Kavanagh points out that because M&A is the process of buying and/or selling a business or its assets, “it’s just as relevant and applicable for SMEs as it is for global multinationals and blue-chip corporations”. In other words, whenever there is a value transaction whereby one business acquires the assets or shares of another, it’s an M&A.

And from a practical standpoint, Paul Taylor, a partner in the corporate department of Fox Williams, says that deal success depends on understanding what a M&A seeks to accomplish. For many he says that “the goal is to achieve a clean exit from a business. But some may wish to stay on and become a part-owner of a bigger business that makes the acquisition”.

Kavanagh thinks the same. However, he adds that a seller may also have other considerations in mind such as how their staff or existing customers will be treated going forward, or whether to be involved for a transition period.

And from a buyer’s perspective, Kavanagh suggests that they “may be looking to grow their business by acquiring a new service or product offering or by adding a profitable company to the group, or to consolidate their market position by buying out a competitor”.

Considerations

Many sales take the form of a share sale rather than an asset sale. The former transfers ownership interests in the company, whereas the latter means the sale of assets and business to another company.

Taylor says that there are benefits and drawbacks to each, but a key driver is tax: “A share sale may give rise to capital gains tax on the profits made. An asset sale will result in corporation tax on the proceeds of the sale made by the company. Once the company has paid the corporation tax, the proceeds of the sale can then be distributed, but if the owners are individuals, they will be charged income tax on the proceeds.” In effect, he warns that there can be double taxation on an asset sale which is why share sales are preferred.

For Kavanagh, the issue that decides which route is taken relates to whether the buyer wants to take over the entire business or cherry-pick the best parts. As he explains, there are two key questions: “Where does the buyer see the value of the transaction and what is acceptable from the seller’s perspective?”

Regardless, he identifies a major issue – valuation.

“Traded companies,” he says, “are listed on a regulated market/stock market and so the value of the shares is used to dictate the value of the business. But for private companies, other metrics may be used to calculate the likely value of the organisation.”

He continues: “Business valuers can benchmark the business against recent transactions for similar-sized companies in the same sector. The sector may have its own preferences when it comes to selecting a metric, but typical examples include multipliers of earnings before tax, turnover and/or profits, renewal contracts, recurring revenue and so on.”

And Taylor thinks along the same lines, precisely because there is no open market for their non-traded company shares which makes it difficult to determine a valuation. This is why he recommends the use of external advisers to value a business.

He go on to explain the main options for sellers: “With a ‘locked box’, the price is locked on a particular date and any leakage out of the company to the sellers and connected persons from then is owed to the buyer. But with completion accounts, the price is subject to adjustment once accounts have been prepared and finalised following the completion date to reflect the true position at the date that the buyer acquired the company.” Taylor tends to see the locked box route as being more preferable for sellers.

Irrespective of the route chosen, key terms that are important to the seller should, says Taylor, be “documented by way of a letter of intent or heads of terms”.

He says that “while such a document generally won’t be legally binding (barring certain specified provisions such as confidentiality), it will record that the parties agreed to proceed with the deal on the basis of the terms”. The document therefore makes it much harder for the buyer or its lawyers to argue about the basis of the sale when the official documentation is drafted.

Naturally, centre-stage of any transaction is money and those looking to make a clean exit will likely be looking for the buyer to make a single cash payment upon completion. However, as Taylor has witnessed, those intending or are required to remain with the business following completion, may see the buyer suggest a different consideration structure.

In fact, he’s often seen “provisions that link a target – say profit or revenue – to the price that is payable at a future date… there are a myriad of other potential consideration structures that may be proposed, depending on the motivations and finances of the buyer”. One example he comes across in private equity transactions is where the buyer expects sellers to stay on with the business and must reinvest a portion of their proceeds into shares or loan notes within the buyer’s organisation.

But often there are obstacles to be overcome that buyers will need resolved ahead of completion; significant issues uncovered by, or revealed to, the buyer via the diligence and/or disclosure processes are relevant here. No matter what is found, Kavanagh says that once identified, they will be incorporated into the contract, together with protective clauses including warranties (statements of fact) and/or indemnities (to provide for compensation) to help ensure the terms are adhered to.

By extension, all of this means that accuracy and fairness are central to the contract. And “if,” as Kavanagh has seen, “the terms of the warranty are broken – statements about the company made by the seller prove incorrect – the buyer has legal remedy to seek damages for breach of contract”.

Managing the process

The M&A process isn’t a quick fire process. Rather, it takes time because buyers will want to conduct due diligence and as Taylor highlights, “the timing of this exercise will depend on the buyer’s level of urgency, the amount of information to review and the materiality thresholds the buyer might have set for such review.”

But as Kavanagh notes, it’s important for sellers to recognise and navigate any obstacles found; they need to “ensure there are no ongoing issues after the transaction has been completed. Record keeping is crucial to this, as accurate records will ensure the correct information is fed to the buyer, speeding up the process and hopefully avoiding any nasty surprises or liability in the future.”

Worryingly, Kavanagh has seen “a tendency for sellers to downplay certain complex aspects of their business or processes, which may have grown organically over time and not be properly recorded”.

It should be said, as Taylor explains, “that due diligence does open up a company’s innermost secrets. It also risks the public, customers or suppliers learning of the deal itself before it completes. On top of this are worries if the potential buyer is a competitor or within the same line of business.”

It’s because of these risks that Taylor recommends that sellers enter into a confidentiality or non-disclosure agreement (NDA) at the outset to “provide some comfort that potential buyers will keep the information they learn during the deal process, and the existence of the potential deal itself, confidential.”

Both sides need to keep in mind that, as Kavanagh tells, an NDA “prohibits either party from divulging any details covered by the terms of the agreement.” It’s not a one-sided obligation.

That said, beyond NDAs there are other ways to protect sensitive information that is disclosed during the transaction. Two options that Taylor mentions are to “only upload data once it has been established that the buyer is sufficiently serious about the deal, and to apply permissions to documents so that they cannot be printed or downloaded.”

An obvious question relates to time – how long will a M&A take? In Kavanagh’s experience, the length of the process will depend on the complexity and size of the transaction: “If relatively straightforward, a typical acquisition should be completed within two to three months, but more complicated transactions can take 12 months or longer; cost will be scaled due to the complexity and time involved, but will always be proportional to the transaction purchase price.”

Taylor thinks the same, saying that “ultimately, this is not a question anyone can answer as there are a vast number of factors that can influence the timing of a transaction, especially there can be other deal-specific complicating factors such as regulatory approval, which can take several months to obtain”. By this he’s both referring to approval from regulators for certain sectors as well as competition issues for the larger concerns.

Personal tax implications

Lastly, while proceeds from a share sale should be taxed as capital gains, with the rate depending on whether the individual is a basic rate, higher or an additional rate taxpayer and whether they have made any other capital gains within the same tax year, there is also the business asset disposal relief (BADR), formerly known as entrepreneurs’ relief, to consider.

Taylor puts great store in BADR since it “currently entitles the seller to a 10% tax rate rather than the otherwise applicable capital gains tax rate.” He adds that, broadly speaking, “this relief should also be available on asset sales and share sales but there are various qualifying conditions and sellers should definitely take advice from a tax advisor before structuring the sale transaction”.

As Kavanagh sums up, “it is important that parties seek tax advice early in the process to ensure that the full tax implications are considered from the outset”.

Summary

Those seriously considering a sale of their business should instruct lawyers and any other advisers as early as possible. They will need corporate finance advisers, accountants as well as lawyers and their early involvement will maximise the chances that the desired outcome will be achieved.