How to Buy a Manufacturing Business in 6 Steps

Buying a manufacturing business can provide immediate access to established customers, experienced employees, specialists equipment, production facilities and valuable intellectual property.

However, acquisitions in the manufacturing sector often involve industry-specific risks that do not arise in many other business purchases, including machinery investment requirements, supply chain dependencies, health and safety obligations and complex customer contracts.

If you have been approached by a party that is looking to purchase your business or if you have held discussions with a view to purchasing a business, this article is intended to give an overview of the sale and purchase process and to identify some industry specific issues which it would be prudent to consider during negotiations.

Table of Contents

• Share Purchase v Asset Purchase
• Step 1: Agree Heads of Terms
• Step 2: Carry Out Due Diligence
• Step 3: Assess Risks
• Step 4: Negotiate Acquisition Documents
• Step 5: Complete the Acquisition
• Step 6: Manage Post-Completion
• How Napthens Can Help
• FAQs

Share Purchase or Asset Purchase?

Before entering detailed negotiations, buyers and sellers should understand the two most common acquisition structures. The best option depends on the individual circumstances, and legal advice should be sought ahead of entering negotiations.

Share Purchase

In a share purchase, the buyer acquires the company’s shares and takes ownership of the entire business, including:

• Assets
• Employees
• Contracts
• Liabilities

This makes for a simpler transfer but may come with historic liabilities and risks.

Asset Purchase

In an asset purchase, it is specific assets of the business rather than the company itself which the buyer purchases. In a manufacturing business, this can include significant machinery, equipment, stock, intellectual property, goodwill, contracts, property and so on.

Asset purchases offer more flexibility as the buyer may negotiate to exclude certain liabilities. For the same reason this can make things more complex.

1. Agree Heads of Terms

If your discussions lead to a preliminary agreement between the parties, the key terms are then often captured in a document called the ‘Heads of Terms’. It is common for these Heads to include:

• Proposed purchase price
• Payment arrangements
• Key deal assumptions
• Transaction timetable
• Exclusivity provisions

An exclusivity period where the sellers agree not deal with any other prospective buyers for a specified period of time is designed to give the parties more time and certainty to get the deal done.

2. Due Diligence

The buyer will investigate the business before deciding to contractually commit to proceeding with the purchase. The due diligence is usually split into three areas:

• Financial – this is typically dealt with between the buyer’s the sellers’ respective accountants and includes the likes of historic accounts, cash flow, capital requirements and existing borrowing arrangements.
• Commercial – this is typically dealt with between the management of the buyer and the sellers in order for the buyer to understand the day-to-day operations of the business, from customer and supplier relationships to production capacity and market position.
• Legal – this is typically dealt with between the buyer’s solicitors and the sellers’ solicitors and involves an extensive questionnaire being submitted by the buyer to the sellers to include areas such as customer and supplier contracts, employment, real and intellectual property, business assets, health & safety and insurance.

The due diligence process enables the buyer to:

• Decide whether it wants to go ahead with the transaction
• If proceeding, confirm the assumptions it has made in respect of the price it is willing to pay and the basis of any adjustments to that price
• Identify any issues that the buyer wants the sellers to resolve before proceeding
• Include warranty and indemnity protection in the share purchase agreement in respect of any issues and risks identified
• Identify and understand the business’ continuing obligations under things such as customer contracts or any property leases

3. Assess the Risks

Long-Term Customer Agreements

The transition for a manufacturing business’ clients should be as smooth as possible to sustain revenue from pre-existing arrangements. Buyers should make themselves aware of the duration, renewal provisions and termination rights within these arrangements.

Change of Control Clauses

Certain customer and supplier contracts contain change of control provisions which may allow the other party to terminate the agreement if ownership changes. These clauses should be identified at an early stage, and legal advice taken on the relevant commercial contracts.

Supplier Dependency

A heavy reliance on a small number of suppliers may increase vulnerability to supply chain disruption and cost increases.

Plant and Machinery Requirements

Manufacturing businesses are frequently capital intensive. Buyers should assess the condition, maintenance history and anticipated replacement costs associated with production equipment.

Commercial Property Issues

Where the business operates from leased premises, buyers should carefully review the relevant lease documentation and understand any ongoing obligations affecting the property. It is recommended that buyers also check whether the commercial lease has “contracted out” of statutory security of tenure provisions.

4. Negotiate the Acquisition Documents

Share Purchase Agreement

If, following the due diligence process, the buyer wishes to proceed, the terms of the deal will be formalised in a share purchase agreement (SPA), the legally binding contract for the sale of the shares in the business. The SPA will cover the following areas:

• Sale and purchase of the shares
• Purchase price – how this is calculated and when it shall be paid.
• Completion
• Warranties
• Adjustment to the purchase price
• Limitations on claims
• Governing law and jurisdiction
• Real property
• Tax covenants
• Indemnities
• Restrictive covenants
• Confidentiality obligations
• Governing law and jurisdiction

Asset Purchase Agreement

Where the acquisition is structured as an asset purchase, the principal transaction document is usually an Asset Purchase Agreement, dealing with the specific assets and liabilities being transferred.

Warranties

Warranties are statements given by the sellers about the company. These mainly cover the same areas as the due diligence process. If a warranty proves to be untrue and the value of the shares is reduced as a result, the buyer can seek recovery from the sellers. A seller can provide a specific disclosure of fact against a warranty to protect themselves against breaching a warranty and facing a claim from the buyer.

Indemnities

Indemnities are promises by the sellers to compensate the buyer on a pound for pound basis if a specific concern that has been identified actually happens after completion.

5. Complete the Acquisition

Once everything has been agreed, the parties move to completion where the share purchase agreement and any other ancillary documents are signed by the parties.

The share purchase agreement will contain a list of documents to be provided by the sellers to the buyer on completion. The buyer will require the statutory books of the company so that once it has paid the stamp duty on the share purchase, they can be entered into the register of members of the company as the holder of the shares.

Employee and Director Matters

Typically, all sellers will resign from employment and all offices held in the company on completion. The buyer may require settlement agreements to be entered into to ensure that the sellers have waived any employment claims against the company.

Existing Borrowing and Security

Any existing loans to the company are likely to need to be redeemed and any security released by the current lenders. The parties’ solicitors will typically deal with this by holding monies in solicitor client accounts and dealing with completion by way of Solicitors undertakings.

Personal Guarantees

The sellers should ensure in advance that they are released from all personal guarantees on or before completion.

Banking Arrangements

The buyer (with the sellers’ cooperation) should ensure in advance that they have dealt with all banking requirements so that they can operate the company’s bank accounts immediately on completion.

6. Manage Post-Completion Requirements

Both parties should be aware of any post-completion obligations they are subject to under the terms of the SPA and any other formalities to be complied with.

For the buyer, this could include:

• Companies House filings
• Updating officers
• Updating persons with significant control
• Filing any special resolutions
• Paying stamp duty
• Updating statutory records

The seller should monitor:

• Warranty claim periods
• Indemnity claim periods
• Tax claim periods
• Restrictive covenant obligations

How Napthens Can Help Clients Purchase Manufacturing Businesses

Buying a manufacturing business often involves far more than agreeing a purchase price. From reviewing customer contracts and production facilities through to negotiating warranties and indemnities, the transaction requires careful legal planning at every stage.

Napthens’ corporate law solicitors advise buyers and sellers on manufacturing business acquisitions, including mergers and acquisitions, share purchase agreements, asset purchase agreements, legal due diligence, corporate restructuring, shareholder arrangements and post-completion compliance.

Manufacturing acquisitions often require input from several specialist teams. Our intellectual property solicitors can advise on IP assets forming part of the deal, while our commercial contracts team can assist with customer agreements, supplier contracts and change of control provisions.

Where premises are central to the transaction, our commercial property solicitors can advise on leases, property obligations and related risks. If employment, HR, immigration or health and safety issues arise, AfterAthena can support with the workforce and compliance aspects of the acquisition.

If disputes arise after completion in relation to warranties, indemnities, property or other transaction issues, our commercial litigation team can advise on resolving them.

Get in touch today via our form to speak with an expert.

FAQs