Sale of First Alpha Limited to Altium Limited

Client: Paul Mayfield, owner-manager of First Alpha Limited
Sector: Technology / software
Work: Business sale to an international buyer

I acted for Paul Mayfield, the owner-manager and sole shareholder of First Alpha Limited, on the sale of the entire issued share capital of the company to Altium Limited, part of the international Altium group. First Alpha was the UK reseller of Altium’s engineering software.

I advised Paul throughout the transaction, taking the lead in dealing and negotiating directly with the buyer and its legal team. This included negotiating the heads of terms, managing and responding to the buyer’s legal due diligence enquiries, negotiating the transaction documents and advising Paul through to completion.

The particular issues when an owner-manager sells a technology business

Selling an owner-managed technology or software business can be very different from selling a business with a large independent management structure. The owner may be the shareholder, managing director, key customer contact and holder of much of the commercial knowledge and goodwill in the business.

For the buyer, this can create a particular focus on the extent to which the business can continue successfully following the sale. For the seller, the challenge is to achieve the agreed value for the business without accepting unnecessary ongoing liabilities or restrictions which undermine the benefit of the sale.

In this transaction, Paul was not simply selling his shares and walking away. The deal also needed to address his continuing involvement with the business following completion and how First Alpha would become part of the purchaser’s wider international group.

Negotiating the deal

My involvement began before the detailed sale documentation. I advised Paul on and negotiated the heads of terms with the buyer.

This is an important stage for an owner-manager. The headline purchase price is only one part of the commercial deal. It is also necessary to understand when and how the price will be paid, whether any element depends upon future performance, what security the buyer requires against potential claims and what the seller will be expected to do after completion.

The eventual transaction included an initial payment together with contingent consideration calculated by reference to future performance. The sale agreement therefore contained detailed provisions governing the calculation of that consideration and the circumstances affecting Paul’s entitlement to it.

This meant that my role was not simply to document a price which had already been agreed. It involved helping Paul understand and negotiate the mechanisms which determined what he would ultimately receive for the business.

Managing the due diligence process

I managed the legal aspects of the buyer’s due diligence exercise and worked with Paul to respond to the buyer’s due diligence questionnaire and follow-up enquiries.

Due diligence can be particularly demanding for an owner-managed business. Practices which have worked perfectly well commercially for many years may not always have been documented in the way that a corporate purchaser and its lawyers expect.

In a technology business, the buyer is also likely to be particularly interested in matters such as customer and supplier arrangements, intellectual property and software rights, employees, commercial contracts and the extent to which the business depends upon particular individuals or relationships.

Part of my role was therefore to help Paul identify what information the buyer genuinely required, organise the legal response and deal with issues arising from the buyer’s review without allowing the due diligence process to become unnecessarily disruptive to the running of the business.

Protecting the seller against post-sale claims

One of the most important parts of acting for an owner-manager is dealing with the warranties, indemnities and disclosure process.

A purchaser buying the shares in a company acquires the company together with its history and potential liabilities. It will therefore normally seek extensive contractual assurances from the seller about the company and its business.

The share purchase agreement in this transaction contained detailed seller warranties covering the business, together with provisions governing liability if a warranty proved to be incorrect.

I advised Paul on those warranties and the associated disclosure exercise. The disclosure letter is particularly important for a seller because it provides the opportunity to identify exceptions to the warranties and thereby reduce the risk of a successful warranty claim after completion.

The objective was to give the buyer the protection reasonably required for the acquisition while ensuring that Paul’s personal exposure following the sale was appropriately controlled.

Escrow and deferred risk

The buyer required 10% of the purchase price to be retained in escrow as part of the transaction.

An escrow arrangement can be significant for an owner-manager because part of the price which has ostensibly been achieved for the business is not actually available to the seller at completion. The legal documentation therefore needs to establish clearly when money can be taken from the escrow account, how claims are dealt with and when the remaining balance is released to the seller.

I advised Paul on the escrow arrangements and the associated documentation, balancing the purchaser’s desire for security against Paul’s interest in ensuring that the retained consideration could not be withheld unnecessarily.

Paul’s position after the sale

The transaction also required careful consideration of Paul’s future relationship with the business.

I advised him on a new service agreement under which he continued with the business as Director of Sales, United Kingdom for an initial three-year period.

For an owner-manager, this aspect of a sale can be just as important as the share purchase agreement itself. Someone who has previously owned and controlled the company is moving into the very different position of being an employee or director within a larger corporate group.

The terms therefore needed to work alongside the sale arrangements, including the contingent consideration provisions, while giving both Paul and the purchaser clarity about his role following the acquisition.

Restrictive covenants

As is common where the buyer is acquiring the goodwill and customer relationships of an owner-managed business, the sale agreement also contained post-completion restrictions on the seller.

I advised Paul on those restrictions as part of the overall negotiation. The commercial objective was to protect the value which the purchaser was buying without imposing restrictions on Paul which went further than was reasonably necessary following the sale.

Taking the transaction through to completion

I coordinated the legal work required to take the transaction from the initial negotiations through to completion.

The final transaction involved the share purchase agreement and disclosure letter together with stock transfers, escrow arrangements, a power of attorney, corporate approvals, Paul’s new service agreement and associated employment and resignation documentation.

For Paul, this provided a single point of legal advice throughout the process: from negotiating the commercial terms with the international buyer, through due diligence and detailed documentation, to signing and completion.

Key areas advised on: business and company sales • owner-managed businesses • technology and software businesses • heads of terms • international buyers • legal due diligence • share purchase agreements • warranties and indemnities • disclosure letters • contingent consideration • escrow arrangements • restrictive covenants • post-sale employment arrangements • transaction negotiation • completion