February 18, 2022
For those involved with the UK’s high-growth tech sector, 2021 was a stellar year and one of the busiest years in recent memory. The latest Government figures show that over £30 billion was raised by the sector with the vast majority of that cash flowing in from US investors: over 37% of funds came from across the pond, dwarfing even the 28% raised from domestic sources. Data from specialist growth company analysts, Beauhurst, also reflect the official figures showing that in 2021 US acquisitions of UK tech companies increased by 50% from 2020 to a total of 130. The previous record of 105 was achieved in 2018.
There is therefore no doubt in the current environment that founders and sellers reviewing exit and investment options should consider the likelihood of transacting with a Stateside buyer/investor. As is always the case with corporate transactions, it is crucially important to be as prepared and as knowledgeable as possible before any negotiations begin.
Governing Law – Which is best and how to chose?
English law and US law (often Delaware) are the two predominant laws for cross-boarder M&A transactions but there are some fundamental differences in approach that will impact on how the transaction is structured. Being aware of these and in particular being aware of buyer expectations can help smooth the transaction process and avoid the chances of a failed transaction.
In the US, acquisitions are often structured as a legal merger of the buyer (or a newly incorporated acquisition vehicle) and the target entity. This concept does not exist under English law (despite the term of ‘Mergers & Acquisitions’ or ‘M&A’ being generally used). In the UK, transactions are therefore structured as a sale of all the assets and business of the target company or, more commonly, a sale of the shares by all of the shareholders of the target.
One other material difference in approach for US transactions is that the overall liability cap that the sellers incur can be far lower than in the UK. In the UK the overall limit on liability that sellers agree to under the purchase agreement tends to be higher. In the USA it is common practice for this to be much lower – nearer 20% of the purchase price or even less. One of the reasons for this is the prevalence of warranty & indemnity insurance in US transactions (more of which below). However, these thresholds tend to be hotly negotiated on each transaction.
There are also some more technical aspects that reflect the difference in approach between the jurisdictions. These include the different basis of calculating damages for a claim under the warranties in the purchase agreement – in the US these tend to be calculated on an indemnity basis (seen as more buyer friendly) which is not common in the UK. The disclosure process in the UK can be wider giving sellers greater opportunity to disclose against the warranties in the purchase agreement (seen as more seller friendly). For example, it is sometimes (although by no means always) the case that the whole contents of a data room can be disclosed against the warranties.
As can be seen each jurisdiction has its advantages and disadvantages over the other in different areas and, as ever, the bargaining strength of the respective parties tends to be the main driver as to which jurisdiction is chosen.
Warranty & Indemnity Insurance
A growing trend in both markets is the increasing use of warranty & indemnity insurance (W&I insurance) which provides insurance cover to buyers and/or sellers (although usually buyers) in relation to losses arising on a breach of warranty or indemnity under the purchase agreement. However, as with all insurance policies, the exclusions need to be carefully reviewed – known matters, for example, will be excluded. Although the UK market is catching up, the US market has been perceived as more sophisticated meaning, in most cases, there tend to be fewer exclusions under the policy. This does mean that premiums in the US tend to be higher. Parties should also bear in mind the overall cost of the policy as this can be high.
If W&I insurance is being considered this should be established early in the transaction process as underwriters tend to have certain specific areas that they require covered in the due diligence process and require a full due diligence process to have taken place.
Data Transfers and GDPR
Tech businesses are often heavy users of personal data. One point that will need to be considered at the very outset of the process is the impact of GDPR on the transaction, in particular if personal data is being transferred into the US at an early stage of negotiations or as part of the due diligence process. The transfer of personal data to the US without appropriate safeguards and contractual agreements (containing the standard contractual clauses required by the GDPR) can constitute a breach of GDPR opening up the target business (which following completion of the acquisition will form part of the buyer group) to the draconian regulatory penalties that such breach may incur.
New UK Government Powers to Scrutinise Transactions
The new National Security and Investment Act came into full effect in January 2022. This Act establishes a new regime for UK Government scrutiny and approval of acquisitions (and investments) that, amongst other things, result in the acquisition of more than 25% of the shares or votes of companies operating in certain sectors. The applicable sectors for tech companies include advanced robotics, artificial intelligence, computing hardware and data infrastructure. The sanctions for failure to comply with the new regime include that the transaction can be unwound.
Maximising Exit Value
As with any M&A transaction or investment, a deal with an US buyer will have its own issues that will need to be addressed through the process but the fundamentals remain for any founder of a tech business: exit value must be maximised. Ensure that the business is in good order and, in particular, ensure that the underlying IP is held by the target (and that this can be demonstrated by the company’s records and agreements), data protection policies and procedures are in place and are robust, and the target’s share capital is clean and filings are up to date.
For further information
Richard Pull is a partner in Goodman Derrick’s corporate team, representing clients on the full range of corporate M&A and capital markets transactions. Amongst other things, Richard has recently acted for Nasdaq listed Digimarc Corporation on its acquisition of UK software company, EVRYTHNG for a consideration of up to US$100 million in Digimarc stock, privacy tech start up Pimloc on its $7.5m funding round led by Zetta Venture Partners and for a North American based family office on its equity investment into a computing company as part of a US$45m funding round. Richard’s biography is available here. He can be reached on +44 (0)7788 340 797 and at email@example.com.
Alternatively, if you are thinking about selling your business or raising finance and would like to explore your options, we would welcome an exploratory chat. Get in touch with us today via this link or email us at firstname.lastname@example.org
“We were delighted with the services that Bluebox offered us. Bluebox’s attention to detail through their Diamond Programme ensured that we were well prepared for when the business was taken to market and that the sale process itself was managed expertly.
We challenged Bluebox with finding the right strategic buyer and thereafter negotiating a deal that met our requirements. In helping initially to identify and to secure the deal with Mountville Mills they accomplished just that. Communication throughout was excellent and professional, managing each stage of the process. I would have no hesitation in recommending Bluebox to any corporate shareholder or private business owner looking to divest their business.”
Richard Millward, Former Client
“We were delighted with the services that Bluebox offered us. Bluebox were challenged with finding us the right strategic investor and, thereafter, negotiating a deal that met our complex requirements. In identifying and securing the deal with LGC they have done exactly that. The process itself was efficient and smooth, largely due to the excellent communication from the Bluebox team, who also demonstrated excellent experience at managing a very engaging auction process. I would be delighted to recommend Bluebox to any corporate shareholder or private business owner looking to divest a business.”
Helen Dickinson, Former Client
It has been a real privilege working with the team at Bluebox over this last year or so. Bluebox’s attention to detail ensured that we were well prepared for when the business was taken to market and the sale process itself was managed expertly. Starting the process, I had no idea exactly what this would entail and the volume of work that has been produced by everyone and the result reached today is nothing short of brilliant.
Hugh Morris, Former Client
We are delighted with the services that Bluebox was able to offer. They showed an intimate knowledge of a deal cycle, managed a tight auction process and were highly communicative from the start. I would happily recommend Paul and his team to business owners contemplating a sale of their business in the next 24 months. Experience is key and this has paid off for us.
Laurence Seward, Former Client
Aligning ourselves early with Bluebox, and entrusting the team to guide us through their process proved to be a highly rewarding investment from all viewpoints. Bluebox’s support significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years. The earlier the engagement the better so far as I am concerned.
Mike Minett, Former Client
We began working with Bluebox in early 2015 through their Blue Diamond Programme, as we were contemplating an exit. We found that the process focussed our minds on the key areas of growth in the business, and prepared us well for the inevitable rigours of due diligence. During the sale process itself, the advice offered by the Bluebox team was invaluable. We found them to be helpful, straightforward and honest.
David Stokes, Former Client
When selecting our adviser, it was extremely important that they had access to international buyers and were experienced in cross-border M&A. The team at Bluebox proved to be invaluable by identifying a strategic acquirer from America who was not known to us and by negotiating an excellent deal for all parties. I was also impressed with the process management from Bluebox, which ensured that the deal was closed in a timely fashion.
Jeff Weinstein, Former Client
When I first engaged with Bluebox, I was hesitant as to the benefits of using an advisor to firstly, find a buyer for my business and secondly, to get a deal over the line. However, now that the deal has completed with KPM, I can honestly say that the finer negotiation points handled by Bluebox and their overall management of this process has been nothing short of first class. I would be delighted to recommend Bluebox’s services to any entrepreneur contemplating the sale of their business.
Bill Ballard, Former Client
Bluebox worked closely with us over the following six months and helped us to implement some key initiatives which made InferMed a more attractive acquisition target. Once we decided to sell the business, the Bluebox team were very diligent in ensuring that no stone was left unturned. They negotiated expertly on our behalf to ensure we got the best deal possible.
Alan Montgomery, Former Client
The pre-sale planning programme that we signed up for with Bluebox made us develop our strategies and focus on the bigger picture. It proved to be a very rewarding investment from all viewpoints and significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years.
Nigel Parsons, Former Client
I have experienced first hand the value that can be created through highly structured pre-sale planning. It amazes me that it is not something that everyone does. It is so disappointing to see around 90% of transactions collapse before they complete and pre-sale planning will not only enhance your price, but also significantly enhance your chance of a closed deal.
James Caan, Investor
We worked incredibly closely with our advisers who provided expert knowledge of the sale process with which we were not familiar. We were truly delighted with the results.
Marten Nielson, Former Client
We appointed advisers to manage the sales process after we had received a number of unsolicited approaches for the business. I was incredibly impressed by the immense value that could be created by expertly negotiating with a group of already interested parties.
Paul Duckworth, Former Client
I was delighted with the service that the team offered and their real attention to detail. The deal was not without its complexities and it was reassuring to have such experienced advisers assisting me throughout the negotiations.
Peter Bennett, Former Client
Truly delighted with the way my sale process was managed. The fact that the team I worked with achieved such a great multiple is testament to their experience and their ability to create some true competitive tension.
James Averdieck, Gü, Former Client
The team at Bluebox provided invaluable support in negotiating this complex transaction. Their access to international purchasers, and exceptional knowledge of cross border M&A ensured that the deal was concluded efficiently, achieving a highly successful outcome for us all.
Jon Parslow, Former Client
“We selected Bluebox after a fairly long round of evaluating potential advisors because of their scientific, yet challenging approach to maximising value. During our initial meetings they showed us how far short of “ready” we were and consequently we completed more preparation in the early stages which meant we were equipped for what was to come. We were delighted with our choice of Corporate Finance partner. I do not hesitate in recommending Bluebox for any SME to consider.”
Simon English, Former Client
Bluebox provided invaluable advice in managing the negotiations with incoming investors. Their skills in handling these discussions were evident from the outset and the vital interface that they provided between the incumbent team and the incoming investors was truly beneficial.
Henry Braham, Former Client
Bluebox have a professional, dynamic and experienced team that is greatly assisting me with my focus on my exit within the next 24 months. Their structured approach is very refreshing and their ‘Blue Diamond’ programme is adding immense value.
Matt Evans, Former Client
The team at Bluebox provided me with a seamless service from the start of the engagement until our deal was completed. Attention to detail was commendable and their understanding of corporate M&A very impressive. I could not recommend them highly enough.
Victor Lewis, Former client
Having tried to sell my business previously – and failed – I was only too aware of the importance of pre-sale planning. This is a talented team offering a service that most people find out about, but too late.
Simon Hulme, Former Client
Bluebox are a quality outfit. Their access to International acquirers and relationships with the highest quality domestic investors was impressive. My shareholders and I received excellent service from start to finish and it was refreshing to be dealing with a senior team throughout the sale exercise.
Michael Clapper, Former Client
I cannot recommend the team at Bluebox highly enough. Their expert guidance throughout the entire sale exercise resulted in my shareholders securing an excellent deal with which the entire team was delighted.
Mark Rodol, Former Client
I’m really pleased with the service Bluebox provided. The team demonstrated excellent knowledge of the process to follow and led negotiations for the hospital in a way that allowed us to ensure we received appropriate value whilst focusing on reputational risk. Communication and service were of a very high standard.
Steven Davies, Former Client
With Bluebox’s expert advice we were able to find the right buyer that will benefit our business strategically. We’re delighted with the outcome and look forward to starting our new chapter
Clive Hillier, Former Client
The advice offered by the Bluebox team throughout the process was invaluable to the shareholders. We strongly believe that participating in Bluebox’s pre-sale planning programme was a significant driver behind the success of the deal. Their project management and negotiation skills throughout the sale process itself resulted in an exceptional deal being delivered to all parties involved.
Harpal Singh, Former Client