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If you own a business, you might be wondering how you might fully ‘unlock’ its value. In many cases, selling your business to a buyer is the most efficient way to realise a return on your invested money. A private equity transaction is where the original owner of a business sells a substantial portion of their shares in the business to an investor. As part of the transaction, the investor buys the shares with the intent to later sell the business for a profit. This article will explain the fundamentals of a private equity transaction in England, and identify the critical legal issues you should consider.
Key Elements of a Private Equity Transaction
At its most basic, a private equity transaction involves the transfer of legal ownership rights (equity) in the business from the original owner to the buyer. This is most commonly done through a share sale.
Often, the buyer in a private equity transaction will be an investor looking to acquire a stake in the business. These investors aim to later sell their stake in the business at a significant profit. This differs from other buyers, such as a competitor looking to acquire your business to integrate it with their existing one.
Furthermore, most private equity transactions tend to be quite large: both in terms of the value of the deal and the portion of ownership in the company. Likewise, the investor usually intends to acquire a majority stake in the business, often at more than 75%. In many cases, the buyer will acquire 100% of the shares in the business.
Lastly, the transaction will usually involve a fairly complex structure. Since most private equity transactions take place as share sales, you may need to restructure the business. As this is a complex process, your transaction team will likely work closely with you when structuring the deal.
Legal Implications
There are several legal implications associated with a private equity transaction.
Rights as a Shareholder
Depending on the portion of shares the private equity investor acquires in your business, you may or may not have any rights as a shareholder once the transaction completes. This is because when you sell all of your shares, your connection to the company as a shareholder ceases. Nevertheless, you may owe certain personal obligations to the buyers after the transaction completes.
Contractual Considerations
The transaction will be executed through a contract called the sale agreement (or the purchase agreement from the buyer’s perspective). The sale agreement will outline the rights and obligations of both parties.
Additionally, you may need to provide additional payment or pay back some of the purchase money if specific performance targets are not met after the sale completes. Your legal team will also negotiate this with input from the accounting and corporate finance team.
Post-Sale Obligations
Your obligations after the sale will depend almost entirely on the terms of the sale agreement. However, as a general rule, the buyer will seek to keep you in your capacity as the previous owner for as long as possible after the sale finalises to facilitate the business’ performance. Therefore, it is in your interest to limit the extent and length of your liability.
Nevertheless, as the founder of the business, you may still be directly involved in the day-to-day management of the business after the sale completes. Hence, the sellers may require you to enter another service contract as a director or senior manager. This will create a set of parallel obligations in addition to those arising from the sale contract.
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Key Takeaways
Selling your business to a private equity investor can be one of the most efficient ways to realise all the time and money you have invested in your business. In some respects, your obligations to the buyer are no different from any other form of selling your business. However, as professional investors, private equity buyers usually insist on more stringent contractual terms in the sale agreement. Consequently, you may incur more liability for the business after the sale agreement.
If you need help selling your business, our experienced business sale lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A private equity sale is where the original owner of a business sells a substantial portion of their shares in the business to an investor. The investor purchases the shares with the intent to later sell the business for a profit.
As with all business sales, your obligations and rights depend on the contract you negotiate with the buyer. However, private equity investors tend to negotiate terms more favourable to their interests. This may leave you with more liability and risk than other forms of disposal.
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