Private share purchase

Most companies are not listed, and most of them are sold like this: the owner sells their shares, and the buyer becomes the new owner of the same company.

The company itself does not change. It keeps its name, its contracts, its staff, its bank accounts and its tax history. Only the name on the share register is different. That is convenient, and it is also the risk — because the buyer inherits everything, including things nobody knew about.

So the buyer looks first. Lawyers read the contracts, accountants check the numbers, tax advisers check the filings. This is called due diligence, and it takes a month or two. Most of what it finds does not stop the deal; it changes the price.

Then the seller makes promises in writing: the accounts are right, there are no lawsuits nobody mentioned, the company owns what it says it owns. If a promise turns out to be wrong, the buyer can claim money back. Those promises are the second half of the price, and they are negotiated as hard as the first half.

The documents, and which one binds

• Heads of terms — the outline. Mostly not binding, except for exclusivity and confidentiality, which are.
• The share purchase agreement — the real one: price, mechanism, conditions, warranties, indemnities, limitations.
• The disclosure letter — the seller's list of everything that makes a warranty untrue. A warranty is only worth what the disclosure letter has not carved out of it, and reading them side by side is the whole exercise.

Signing and completion are two events

If nothing outside the parties' control is needed, they can be the same day. Usually they are not: merger control, a regulator, or a landlord's consent has to arrive first. The gap creates its own problem — who bears the risk that the business changes in between — and the answer is a set of covenants about how the company may be run while everybody waits.

The price is not the price

Two mechanisms, and the choice is one of the most consequential in the agreement:

• Completion accounts. The price is adjusted after closing for the cash, debt and working capital actually present. Fair, and it produces months of argument about definitions.
• Locked box. The price is fixed by reference to a historical balance sheet, and the seller undertakes that nothing has leaked out since. Certain, and the buyer takes the trading risk from that date.

What warranties are actually for

Two things, and the first is the surprise. They allocate risk — a claim can be made if a warranty is untrue. But their more important job is disclosure: a seller asked to warrant something must either warrant it or disclose why it cannot, and that process surfaces more than diligence usually does.

Limitations, which are the real negotiation

A warranty without limits is unusable, so every agreement caps them:

• A cap on total liability, often a fraction of the price, and a separate higher cap for title and capacity, which go to whether the seller could sell at all.
• A de minimis — claims below a small figure are ignored — and a basket, a total that must be exceeded before anything is payable.
• Time limits, usually short for commercial warranties and long for tax, because tax authorities have their own clocks.
• Knowledge qualifiers — "so far as the seller is aware" — whose scope depends on whose awareness, and whether anybody was required to go and look.

Warranty and indemnity insurance

An insurer stands behind the warranties instead of the seller. It is now routine, and it has changed the shape of these transactions: a fund selling a portfolio company can distribute the whole price to its investors rather than leave a retention behind for years. The buyer's recourse is to an insurer rather than to a person, which is usually better — and the policy has its own exclusions, which are read as carefully as the agreement.

Share deal or asset deal

The alternative is to buy the business rather than the company — see the asset purchase. The trade is exact:

• A share deal moves everything in one step, including liabilities nobody has found. Simple to execute, riskier to own.
• An asset deal moves only what is listed, so unknown liabilities stay behind. Cleaner to own, and every contract that needs a consent becomes somebody else's veto.

Tax usually decides it, and the two sides usually prefer opposite answers, which is why the choice appears in the price.

Where these deals actually break

Not on price. They break when diligence finds something the seller cannot fix and will not indemnify — an environmental liability, a customer contract terminable on change of control, a tax position taken years ago that will not survive review. The negotiation then becomes about who owns a risk neither side can size, and that is the question with no good answer.

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.