Are considering selling your business or buying one? 

Business transfers are often complex undertakings. In a business transfer, there are several things that need to be considered and prepared. Some preparations are needed before contacting a potential buyer, for example, all dialogues with a potential buyer should take place under a confidentiality commitment which should be prepared before contacting any future purchasers. In this article we will briefly touch on what is meant by a business transfer, how it is done and how we can be of help in a business transfer.

What is a business transfer?

You can transfer all or part of your business and a transfer can be done in different ways. In this article we will mainly focus on the transfer of private limited companies.

Asset transfer 

One way to transfer a company is to sell the company's assets, in law this is called an asset transfer. Assets sold can be tangible assets such as inventory and intangible assets such as trademarks.

Share transfer 

Another way to transfer a company is to sell shares in limited companies, in law this is called share transfer. It should be noted that this only applies to companies in which it is possible to have shares such as a private or public limited company (SE: Aktiebolag). It is not possible to sell individual companies (also referred to as sole traders) given that these are not a legal entity. This means that only assets can be sold in sole traders or individual companies. The remainder of this article mainly concerns the sale of limited companies.

Obligation split following transfer 

While we have so far only discussed a company’s assets, if you are to sell the entire company through share transfer, this means that you also transfer obligations that the company is bound by, for example employment agreements or other agreements.

It is not uncommon that buyer, following purchase, may run the company in the same name and organization number and the seller, following purchase, retains responsibility for rights and obligations of the company even some time after the sale. How far the seller's responsibility extends depends on what commitments there are and what has been agreed in the sale. This is why the share transfer agreement is so important. A good share transfer agreement should govern the obligations and responsibilities of the parties following sale.

One important caveat to this, and a tip to anyone interested in purchasing a company, is that it is not uncommon for contracts to contain provisions allowing the parties to terminate or change their rights under the contract in the event that there is a change of ownership or change in structure of one of the parties to the contract. This is sometimes referred to as a change of control clause.

Preparation

The sales process usually starts in the form of dialogue between buyers and the seller. Once it starts, it is good if some preparatory activities for sale have been undertaken. This is often not the case and will then take place in parallel during the process. While possible, undertaking preparatory activities in parallel can lead to the process becoming more stressful due to a lack of time to conduct a proper company inspection. In the worst case, various negative consequences can arise when a company has been transferred and is not in the condition assumed by the buyer. If, for example, the company’s accounting is not correct, the purchase price paid may be too high, or prohibited loans may appear. There are many other examples of negative consequences.

One such preparatory activity is to assess at an early stage how much the company is worth and factors that affect its value. For example, how much capital does the company sit on and how is capital tied up in the company? Here, the company's auditor can often be helpful. In this phase, we lawyers can analyse what different agreements look like and how different agreements can have an impact on value. For example, if there are important customers or suppliers associated with the company, we can analyse the term of the agreements, which can affect the company's value. Unfortunately, things that diminish a company's value can often come as a surprise. If, for example, a digital product is an asset, the lack of correct GDPR handling can reduce the sales amount, or of course increase the amount if no measures are needed.

What is mentioned above is often done through a company inspection (so-called ‘Due Diligence’). By conducting Due Diligence early in the preparation phase rather than in parallel to any discussions on sale, any value-adding measures can be taken, and it is easier to assess whether the company is ready for sale.

Buyer

There are different ways to find buyers of companies. Not infrequently, sellers and buyers have already found each other, they may, for example, be in the same industry and a company may be able to expand its business by buying another company. If there is no buyer on the horizon, the seller can turn to a company broker who can actively look for a potential buyer. Such a broker can often also help with the valuation of companies. These are contacts we are associated with and can help put you in touch with.

It is our experience that it is important to establish a plan in order to be able to identify the best buyer. When selling a company, there are mainly two types of buyers, those who only invest and do not interfere with the operational running of the company and those who are operational and can contribute to growing the company or adding skills that are lacking.

Once a potential buyer is identified, they will also want to screen the company and do their own Due Diligence. The seller has a knowledge advantage about the company and transparency needs to be created between the parties so that the potential buyer is aware of what he or she is buying. To ensure an open dialogue between seller and potential buyer, we always recommend that this process begins with the seller and potential buyer signing a confidentiality agreement. With a confidentiality agreement, both parties can openly share information with each other and assess the company's content and value.

If both seller and potential buyer agree that the company should be transferred, the confidentiality agreement usually runs until a share transfer agreement has been signed.

The transaction

The transfer of the business is done through a share transfer agreement. The transaction (i.e. transfer of shares) that is carried out in a share transfer agreement can either be done upon signing the share transfer agreement, or alternatively the signing of the agreement can take place one day and access to the shares given another day. All of this should be clearly governed in the share transfer agreement. The approach taken depends on what is most convenient for the seller and buyer. As you can see the share transfer agreement is an important document and there are many things to keep in mind when writing the agreement. For example how the seller's guarantees are designed, what happens if there is a fault compared what was guaranteed, shall the seller be restricted to conduct a competing business following the transaction and if so, for how long? It is therefore important to consult a lawyer so that the agreement is correct and in accordance with the intentions of the parties.

When we support during a business transfer, we are a bit like a janitor who draws up a checklist to ensure that all of the commitments of the seller and buyer are actually carried out as planned. It can often feel a little overwhelming to carry out a business transfer, partly because the transaction may not be an exercise you conduct on a regular basis and partly due to the amount of paperwork involved in a business transfer. We help with things such as changes in the share register, submission of share certificates, appendices to the shareholders' agreement such as articles of association, significant agreements that accompany the business transfer, the annual report. In addition, we naturally ensure that the terms agreed in the share transfer agreement are in accordance with what the seller and buyer want.

Following the transaction

Unfortunately, situations, such as deviations from the evaluations made of the company before the transaction, sometimes arise after the transaction is completed. These can be due to various reasons and it will then be important to be able to go back to the share transfer agreement and see how the buyer and seller have agreed to resolve such deviations.

This is one of the reasons it is very important to have a lawyer involved in the transaction and the agreements that are signed. With a good agreement, unnecessary conflicts can be avoided.

At a stage when a company has been sold and it turns out that there are deviations in the company, friction often arises between seller and buyer. Throughout our work we have experience of suggesting alternative ways of moving forward and as a last resort, if sellers and buyers cannot agree, giving advice as to whether or not it is worth taking the dispute to court.