Buying and selling a manufacturing business: the legal issues

Any M&A involving a manufacturing business in the UK will attract regulatory scrutiny from a range of sources. Buyers and sellers alike must be prepared to examine relevant regulations and assess how any approval applications will affect the timeline of the transaction itself. The impact any restrictions or reporting obligations may have after completion should always be considered.

Businesses in many industry sectors will be caught by the National Security and Investment Act 2021 (NSIA). This key piece of legislation allows the UK government to scrutinise and intervene in certain acquisitions made by anyone, including businesses and investors, that could harm the UK’s national security.

Where the target entity is involved in sensitive areas of the economy, the M&A may represent a ‘notifiable acquisition’. Areas caught include MOD, Advanced Robotics, Artificial Intelligence, Communications and Critical Government Supply Chains.

In our experience, more manufacturing businesses than might be expected meet the mandatory notification criteria under the NSIA, including suppliers to key infrastructure businesses such as those above.

We found that an industrial spring manufacturer had to go through a second round assessment because they supplied a company who sold to the MOD.

Clearance must be obtained before any deal is finalised and this can take six weeks for round one clearance, with another six to eight weeks if a more detailed assessment is required. Deal timetables need to take this into account, which can expose a seller to risk if revenue slows due to delay. Government powers here are extensive, ranging from imposing certain conditions on the deal and, in some cases, blocking the deal entirely.

Depending on the size of the deal and the nature of the target business the possible involvement of the Competition and Markets Authority (CMA) should be factored in, although some form of dominant position is required in the relevant market. Sellers and buyers can be caught out in assuming the relevant market is broader than is actually the case, so early advice should be taken. This is particularly the case where the deal involves the consolidation of competing companies. Additionally, sector specific regulations must also be analysed. These include environmental laws, employment law, consumer protection, and trading standards.

It is essential that the scope of regulation affecting the merger or acquisition is clarified early in the deal cycle. Failure to identify the various approvals and regulatory hurdles that may arise will cause delay and inject uncertainty into the deal process.

For buyers of a manufacturing business the risks associated with environmental legislation and standards are twofold. Buyers will want to satisfy themselves that:

• The target business has sufficient measures in place to meet its environmental responsibilities
• There are no historic environmental regulatory breaches or ongoing investigations that they may be responsible for post completion

Manufacturers are subject to a whole raft of regulations covering waste disposal, carbon emissions, water and energy consumption, packaging waste, and anti-pollution measures. During due diligence, sellers must be ready to produce evidence of compliance with all relevant regulations and hand over for inspection all necessary licenses and permits from the relevant authorities.

Where the business being purchased has operated on the same site for any length of time, buyers will often require specialist environmental surveys of the land to identify any undiscovered contamination or other potential issues. These could lead to future liability or regulatory sanctions. If this risk is high, given the nature of the business, a site survey may be the only way to satisfy buyer and seller. If the buyer is borrowing and securing the property, its lender may also require evidence, given a lender enforcing against security can assume the (owner) risk. As with NSIA early planning to arrange such a survey can avoid delay and risk to both parties.

Any identified risks will undoubtedly pose problems for the transaction, and it is often good practice for the seller to carry out this kind of risk assessment before going to market. Where contamination, or other potential breaches, are revealed, it may be necessary to carefully negotiate appropriate warranties or indemnities or renegotiate the sale price.

Manufacturing businesses differ markedly from businesses in other sectors because of the central importance of their long term commercial relationships and partnerships. When buying or selling a business, price will often be dictated not so much by customer data or intellectual property, but by the strength of the target businesses’ relationships with suppliers, customers, distributors, and others.

During due diligence, the buyer should scrutinise the durability of the target businesses’ contracts with major customers, long term suppliers, and distributors. Transferability of these contracts post completion should be confirmed. This will involve close scrutiny of exclusivity provisions, termination rights, and change of control clauses. These could, potentially, enable a third party to terminate a crucial contract post completion or alter the terms following a sale.

Sellers are well advised to analyse their own contract in advance in order to demonstrate value to a buyer. Contracts may be short term or of limited duration, which would normally reduce the value to a buyer. However, a long history of regular revenue from a particular customer may help limit the impact on price/value. To demonstrate this, a seller may have to provide revenue by a key customer for more than the standard three years.

Contract analysis can also show how revenue is built during a customer journey. If bespoke machinery is required or the manufacturer resolves customer problems, a premium price may be justified. An established and high quality process map can also demonstrate a company’s “secret sauce” or key value add to a buyer. This is intellectual property in the form of unregistered know how, but it can have real value if properly evidenced.

Sellers can smooth the transaction by identifying any contractual issues early in the process, in particular, liaising with their existing suppliers and distributors to establish whether any necessary consents may be withheld.

Manufacturers depend on their workforce. Employees – from warehouse operatives, machinists, and other operational staff to skilled technicians, engineers, and industry specialists – will often be the target entity’s most valuable asset.

Employment law considerations, including the retention of key staff and, where a merger is involved, integration of legacy staff into the new venture, will be priorities for buyers.

Employment law matters that typically arise in legal due diligence within the manufacturing include:

• Scrutiny of existing employment contracts/statements of terms for notice periods, termination rights, restrictive covenants and bonus payments or other incentives
• Assessment of any trade union arrangements at the target entity, including collective bargaining powers
• Whether service agreements for senior executives/management will remain in place post completion
• What health and safety procedures are in place and an analysis of the target company’s compliance with relevant regulations including the UK Working Time Regulations and anti-discrimination laws
• Immigration compliance is increasingly important with visa rules being complied with but also the company must retain records which comply with the rules
• If the deal is structured as an asset sale rather than a share sale, TUPE regulations need to be complied with (requiring consultation with staff before completion)
• Regular overtime can also impact holiday entitlement, which is often missed by selling companies

Sellers should proactively gather all employment documentation, including contracts, policy frameworks and details of any employee disputes ahead of any sale. Gaps in compliance history or missing paperwork can create delays in the sale process and reduce buyer confidence.

Manufacturing businesses rely heavily on physical infrastructure – not just land and buildings, but high value machinery, plant and equipment as well as bespoke, high spec assembly lines. Extensive due diligence around ownership, condition and transfer of property and assets will play a significant part in any manufacturing M&A.

Where property is leased, for example, buyers should check that the freeholder’s consent to any transfer will be forthcoming. Additionally, lease conditions, planning permissions and environmental licences may all contain restrictive conditions that could limit production capacity and hinder the acquirers plans for future growth.

Similar caution should be exercised in relation to machinery. Detailed checks on the condition and lifespan of specialist, high value equipment included in the sale should be carried out by suitably qualified technicians. Where assets are leased or subject to finance agreements, the terms of these agreements should be checked for transfer conditions and restrictions.

We have set out five key legal considerations in manufacturing M&As. Other issues that arise include how best to legally structure the deal, pension liabilities, intellectual property and tech ownership, product liability compliance matters, taxation and overall risk allocation between buyer and seller. You can read a lot more about M&As on our dedicated M&A hub for businesses.

DMH Stallard advises a wide range of manufacturing businesses and investors in the sector. We have spent decades working across industries as diverse as engineering, aerospace, chemicals, electronics, pharmaceuticals, and retail/consumer products. Our ongoing sponsorship of The Manufacturing, Engineering and Technology Alliance (METALL) demonstrates our deep commitment to fostering best practice and encouraging growth in the sector.

Our team of expert Sales, Acquisitions and Mergers lawyers cover every aspect of the manufacturing M&A deal cycle, from advising sellers right at the outset on the legal implications of marketing and selling a business to assisting both buyers and sellers on valuations, carrying out extensive due diligence, negotiating and drafting deal documentation. Once the deal is completed, we are on hand to manage integration and quickly respond to any issues that may arise.

For an initial conversation get in touch.