Expert opinion

4 technical essentials to remember when negotiating a trade sale

Rob Starr, Head of M&A at Shaw & Co, discusses some technical considerations when negotiating a trade sale.

5 minutes
May 16, 2022
Rob Starr
Tim Gander Photography & Christina Wocin on Unsplash

Negotiating a trade sale is a complex process and if conducted without expert guidance can lead to dreaded ‘value erosion’. Here are some technical essentials to remember:

1 - Heads of agreement

Getting this document right and managing the process well is crucial. A heads of agreement is a non-binding document that sets out the key terms of a proposed agreement between parties. It needs to capture the key commercial issues without becoming the full sale contract. This balance gives buyers wiggle room to walk away if they, on further scrutiny, don’t like what they see. But also, crucially, it allows the seller to keep their most powerful tool, competitive tension, because they still retain the option to sell to another party after any exclusive period elapses.

The heads of agreement normally grants the buyer a legally binding period of exclusivity in which they can do their due diligence. This period needs to be short as possible and well managed as the price rarely goes up in this phase but can often come down if issues are uncovered.

2 - Due diligence

Due diligence is often referred to as the most painful part of the sale process, but only if you are not fully prepared. We covered due diligence in our Blog '5 things to do in your business before you exit' and if you have taken the route of vendor due diligence (VDD) this part of the sale process is largely completed. Any buyer will look at your business in a way that you may not have in the past. As such there will always be ‘top up’ questions to a VDD exercise. However, these will be light compared to the original process and should be easily dealt with by you and your team.

“Fail to prepare, prepare to fail”

If you have not opted for VDD, due diligence can be expected to take up to three months. During this time the business is at risk of a negative event and as such management needing to be on their best form to deliver the forecast numbers. Preparation is key here! A well-prepared data room in advance of due diligence will reduce the workload in this phase significantly. “Fail to prepare, prepare to fail” is very apt cliché when it comes to due diligence.

Rob Starr, Head of M&A at Shaw & Co

3 - Negotiating the sale and purchase agreement (SPA)

As the main legal document in any sale process, the SPA sets out the agreed elements of the deal and includes a number of important protections. It also sets out the terms of payment or consideration paid by buyers to a seller in the form of cash, debt (such as a loan note issued by the buyer), shares in the buyer, or a combination of these. While the seller’s preference is normally cash upon completion, often a portion of the consideration will be retained until certain conditions are met and to give the buyer the comfort that there is money available in the event of any warranty claim.

Earn outs

One popular method is for the seller to earn out the retained or additional consideration if the business increases its earnings by an agreed amount over a defined time period. This means that a buyer pays for growth only when it has been achieved by the business (instead of relying on forecasts), while the seller can achieve a higher overall price by benefitting from future growth. While they are a simple concept, earn outs can add potential complications. For example, the seller may find that changes brought in by the new owner impact their ability to achieve the predefined targets. Factors like these need to be carefully addressed in the SPA.


Warranties are statements of facts made by a seller in the SPA relating to the condition of the company being sold. If a warranty about the liabilities and condition of the company subsequently proves to be untrue and the value of the company is reduced, the buyer may have a claim for breach of warranty. Warranties will cover all areas of the company including its assets, accounts, material contracts, litigation, employees, property, insolvency, intellectual property and debt. If more specific risks are identified during due diligence, it is likely that these will be covered by an appropriate indemnity in the SPA under which the seller promises to reimburse the buyer on a pound for pound basis for the indemnified liability.

Disclosure Letter

A seller can gain some protection from warranties however, through use of a disclosure letter. This document is the seller's opportunity to disclose to the buyer any matters which qualify or contradict the warranties contained in the sale and purchase agreement. The seller's potential liability for a breach of warranty is reduced to the extent that a matter is fairly disclosed. For the buyer, it supplements the due diligence exercise in giving them the fullest picture of the target company or business.

On a personal as well as a financial note, it is wise to mitigate your post-deal exposure. If you are convinced, as I hope you are, of the strength and success of your business, it is all too easy to offer too much in the way of indemnities – and allow these to remain in place for many months after completion. Your advisers can help you set sensible liability caps and minimum thresholds within the SPA. You may also want to consider limiting your exposure through relevant limited liability insurances.

You have probably already got the idea that this is a complex and lengthy process involving hundreds of ancillary documents and legal due diligence. This may be eased in some part by using vendor due diligence (read more on this in "5 things to do in your business before you exit"), which can also cover legal as well as financial matters.

4 - SPAs: Advanced thinking

Be aware of the latest trends in this rapidly evolving area. A sale and purchase agreement (SPA) is a legal contract that obligates a buyer to buy and a seller to sell. Sounds simple. But purchasers and sellers are becoming increasingly sophisticated in seeking to exploit the potential value to be gained through the negotiation and execution of the SPA. It is normally the responsibility of the buyer to produce an SPA, however, in an aggressive process a seller can offer an SPA to multiple bidders. This is less common in the SME marketplace but if the business to be sold will generate a high level of competition, a standard document can be provided to multiple parties for comment.

While poorly drafted legal documents can cause you huge headaches, so can poor or out of date advice from your business and financial advisers, so always choose someone who knows the latest trends and tactics. If you are able to identify your buyer or likely buyer in advance, this may influence your choice.

For example, if your buyer is likely to be based in the United States, despite the contract being based in UK law, they will bring certain approaches that are acceptable in the US but not the UK. A lawyer experienced in dealing with this will ease the process significantly.

We work with UK SMEs and small-cap PLCs that are ready to sell or dispose of a business through a trade sale or owner-managers that are looking to exit the business they’ve grown. Our value lies in helping clients assess their readiness to exit, finding the right buyers willing to pay the right price and managing the trade sale process whilst minimising associated risks. For a confidential, independent, no obligation discussion on how to sell a business, click the 'Let's chat' button.

Rob Starr
Rob Starr
's bio

The owner of People Source, a Sunday Times Fast Track 100 business, wanted to diversify his asset portfolio. So he came to us to help sell the business to a new owner.

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