It is not hard to find examples of mergers within the profession. In August 2023, Optician noted that Eyesite Opticians in Brighton had merged with TH Collison Opticians after the death of its former owner Brian Collison. The practices, situated less than a mile away from each other, now trade from Eyesite’s North Street site and patient records were transferred.
Not two months later, came the merger of Lesley Cree Opticians in Radcliffe on Trent with Amanda Findlay Eyecare in Keyworth and Ruddington. The combined practices operate as Lesley Cree Opticians with around 20,000 patients.
In February 2024, the Keswick Reminder reported that Smith & Butterfield Optometrists and Kirkbride Eyecare in Keswick had merged to trade from Smith & Butterfield’s practice with patients and notes transferred over from Kirkbride Eyecare.
There are, of course, others doing the same. But for those new to the process, what does it involve?
In overview, mergers and acquisitions (M&A) refers to transactions between two companies that combine in some form. Although mergers and acquisitions are used interchangeably, they come with different legal meanings. In a merger, two companies of a similar size combine to form a new single entity.
In contrast, an acquisition occurs when a larger company acquires a smaller business, thereby absorbing the smaller firm. M&A deals can be friendly or hostile, depending on the approval of the target company’s board.
Deals done
M&A activity is big business. It hit a high in 2021 but slowed in 2022 and again in 2023, according to a February 2024 note from PricewaterhouseCoopers (PwC). It said: ‘The UK saw 3,628 deals across 2023, compared to 4,362 the previous year, a 17% decline.’
It continued: ‘Overall, there was… a total deal value for the year to £88bn. However, the total deal value in 2023 was down 41% compared to almost £150bn worth of deals seen in 2022.’
Nevertheless, the figures involve some large numbers and activity in this area is still worthy of consideration. As the news stories earlier note, M&A is as much for the small firm as it is for the conglomerate.
From a practical standpoint, Paul Taylor, a partner in the corporate department of Fox Williams, is of the view that success depends on understanding what an M&A seeks to achieve. For many, he says: ‘The goal is to achieve a clean exit from a business. But some may wish to stay on and become a part-owner of a bigger business that makes the acquisition.’
Deciding on the goals at the outset and communicating these to a potential buyer upfront makes it more likely that the desired outcome will be achieved.
Considerations
Many sales take the form of a share sale rather than an asset sale. In essence, the former transfers ownership interests in the company, whereas the latter means the sale of assets and business to another company.
Taylor says there are benefits and drawbacks to each, but a key driver is tax: ‘A share sale may give rise to capital gains tax on the profits made. An asset sale will result in corporation tax on the proceeds of the sale made by the company.
‘Once the company has paid the corporation tax, the proceeds of the sale can then be distributed, but if the owners are individuals, they will be charged income tax on the proceeds.’ In effect, he warns that there can be double taxation on an asset sale, which is why share sales are preferred.
An issue for private limited companies is that they have no open market for their shares, making it difficult to determine a valuation; at least not without external advisers. Here, Taylor recommends ‘a valuation is obtained from a reputable corporate finance adviser early on in the process.’
He explains, however, that there are options for sellers: ‘With a “locked box”, the price is locked on a particular date and any leakage out of the company to the sellers and connected persons from then is owed to the buyer. But with completion accounts, the price is subject to adjustment once accounts have been prepared and finalised following the completion date to reflect the true position at the date that the buyer acquired the company.’ Taylor sees the locked box route being more preferable for sellers.
Regardless of the route chosen, key terms that are important to the seller should, says Taylor, be ‘documented by way of a letter of intent or heads of terms’. He says: ‘While such a document generally won’t be legally binding (barring certain specified provisions such as confidentiality), it will record that the parties agreed to proceed with the deal on the basis of the terms.’
In other words, the document makes it much harder for the buyer or its lawyers to argue about the basis of the sale when the official documentation is drafted.
Naturally, centre-stage of any transaction is the payment and those looking to make a clean exit will likely be looking for the buyer to make a single cash payment upon completion.
However, as Taylor has seen, those intending or are required to remain with the business following completion, may see the buyer suggest a different consideration structure.
In fact, he has often seen ‘provisions that link a target – say, profit or revenue – to the price that is payable at a future date… there are a myriad of other potential consideration structures that may be proposed, depending on the motivations and finances of the buyer.’
One example he comes across in private equity transactions is where the buyer expects sellers to stay on with the business and must reinvest a portion of their proceeds into shares or loan notes within the buyer’s organisation.
Often there are obstacles to be overcome that buyers will need resolved ahead of completion such as significant issues that will be uncovered by, or revealed to, the buyer via the diligence and/or disclosure processes.
But even so, Taylor advises: ‘In all cases, they should communicate potential issues to their advisers at the outset of the process. Consider together at what stage to make these known to the buyer and how best to handle them at that time.’
Managing the process
The M&A process takes time because buyers want to conduct due diligence and as Taylor highlights: ‘The timing of this exercise will depend on the buyer’s level of urgency, the amount of information to review and the materiality thresholds the buyer might have set for such review.’
Another consideration for Taylor is the high likelihood of the need to give warranties in the sale documentation relating to the company and its business operations, ‘against which a seller can disclose any untrue or misleading information to limit their liability.’
It should be said that due diligence does open up a company’s innermost secrets. It also risks the public, customers or suppliers learning of the deal itself before it completes. On top of this are worries if the potential buyer is a competitor and/or within the same line of business.
It is because of these risks that Taylor recommends sellers enter into a confidentiality or non-disclosure agreement at the outset to ‘provide some comfort that potential buyers will keep the information they learn during the deal process, and the existence of the potential deal itself, confidential.’
That said, there are other ways to protect sensitive information that is disclosed during the transaction; two options that Taylor mentions are to ‘only upload data once it has been established that the buyer is sufficiently serious about the deal and to apply permissions to documents so that they cannot be printed or downloaded.’
Personal tax implications
Lastly, while proceeds from a share sale should be taxed as capital gains, with the rate depending on whether the individual is a basic rate, higher or an additional rate taxpayer and whether they have made any other capital gains within the same tax year, there is also the business asset disposal relief (BADR), formerly known as entrepreneurs’ relief, to consider.
Taylor puts great store in BADR since it ‘currently entitles the seller to a 10% tax rate rather than the otherwise applicable capital gains tax rate.’
He adds that, broadly speaking, ‘this relief should also be available on asset sales and share sales but there are various qualifying conditions and sellers should definitely take advice from a tax adviser before structuring the sale transaction.’
Summary
Those seriously considering a sale of their business should instruct lawyers and any other advisers as early as possible. They will need corporate finance advisers, accountants as well as lawyers and their early involvement will maximise the chances that the desired outcome with be achieved.
