M&A: What Is It and How Does It Work?

M&A — mergers and acquisitions — is the broad term for transactions in which companies combine, or one company acquires another. For most business owners, M&A is relevant at two moments: when someone approaches them about buying their business, and when they are thinking about acquiring another business themselves. This guide explains how M&A works in the UK, what the process looks like, and what to watch out for.

Merger vs acquisition — what’s the difference?

Technically, a merger is when two companies of similar size combine to form a new entity. A acquisition (or takeover) is when one company buys another. In practice, most transactions in the SME market are acquisitions — one party buys, one party sells — and the term “M&A” is used loosely to cover both.

What both have in common: they’re legally complex, take longer than most parties expect, and the gap between the price agreed in principle and the price actually received can be significant if the legal and commercial due diligence isn’t managed properly.

Why do companies do M&A?

From a buyer’s perspective, the main motivations are: acquiring customers or market share quickly, buying capability (technology, team, IP) rather than building it, entering a new geography, or removing a competitor. From a seller’s perspective: realising value built up over years, finding a buyer for a business that would be hard to scale further alone, or succession planning when there’s no obvious internal buyer.

The motivations matter because they shape what the buyer actually wants from due diligence, which warranties they’ll focus on, and how they’ll structure the deal price.

Deal structures: share purchase vs asset purchase

The most fundamental legal question in any business acquisition is whether the deal is structured as a share purchase or an asset purchase. They are very different transactions with very different risk profiles.

Share purchase (SPA)

The buyer purchases the shares of the target company. Because the company itself doesn’t change hands — only its ownership does — the buyer acquires everything: all the assets, all the contracts, all the liabilities, all the employment relationships, and all the historic legal risk. A contract the company signed five years ago, a tax liability HMRC hasn’t yet raised, an employment tribunal claim from a former employee — all of it passes to the buyer as part of the transaction.

This is why due diligence matters so much in a share purchase. The buyer needs to understand what it’s acquiring before it commits. This is also why the warranty and indemnity provisions in a Share Purchase Agreement are heavily negotiated — they’re the mechanism by which the seller gives the buyer recourse if undisclosed problems surface after completion.

Share purchases are the more common structure for acquiring trading businesses. Existing contracts (with customers, suppliers, landlords) continue automatically — there’s no need to get consent to “transfer” them because legally the same company is still a party to them.

Asset purchase (APA)

The buyer purchases specific assets of the business rather than its shares. This gives the buyer the ability to cherry-pick what it wants — the customer contracts, the IP, the equipment, the goodwill — and leave behind liabilities it doesn’t want to take on (historic tax issues, legacy disputes, pension obligations).

The trade-off: existing contracts don’t transfer automatically. The buyer needs to obtain consent from each counterparty to novate (transfer) contracts it wants to keep. If the business has a large customer base with many individual contracts, this can be a significant exercise. Employees also need to be transferred under TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006), which imposes notification and consultation obligations.

Asset purchases are common for distressed acquisitions (buying out of administration), for acqui-hires (where the buyer primarily wants the team), or where the target’s corporate history is too messy to stomach.

Our free Asset Purchase Agreement generator can be used as a starting point for simpler asset acquisitions. For a full business sale or purchase, legal advice is strongly recommended.

The M&A process from start to finish

For an SME transaction, the typical timeline is 3–6 months from heads of terms to completion. Here’s how it usually unfolds.

1. Initial approach and NDA

A buyer approaches the target (directly or through a broker/adviser), or the seller puts the business on the market. Before any financial or operational information is shared, both parties sign a non-disclosure agreement. This is standard practice and protects both sides — the seller’s confidential information, and the fact of the discussions themselves.

2. Information pack and initial valuation

The seller provides a confidential information memorandum (CIM) or similar document setting out the business — financials, customers, team, market position. The buyer uses this to form an initial view on valuation and whether to proceed.

3. Indicative offer / letter of intent

If the buyer is interested, it submits an indicative offer — a non-binding expression of interest with a proposed price and deal structure. This is sometimes documented in a letter of intent (LOI) or short-form heads of terms.

4. Heads of terms

Once the parties are aligned in principle, they document the agreed terms in a heads of terms (also called a term sheet or memorandum of understanding). This sets out: price, structure (share or asset purchase), payment terms (including any deferred consideration or earn-out), conditions to completion, exclusivity period, and key timeline.

Heads of terms are usually not legally binding on price and deal terms (they’re subject to due diligence and negotiation of final documents), but certain provisions typically are binding: exclusivity (the seller agrees not to negotiate with other buyers for a fixed period), confidentiality, and costs clauses.

Agreeing heads of terms before instructing lawyers is good practice — it forces the commercial principals to agree the key deal points before the lawyers get involved, which reduces cost and delay.

5. Due diligence

Due diligence is the buyer’s process of verifying what it’s buying. For a share purchase, this covers: financial (accounts, management information, debtors/creditors), legal (contracts, IP, property, employment, litigation, regulatory), tax, and sometimes commercial and technical matters.

The buyer’s lawyers send a due diligence questionnaire to the target’s lawyers, who respond with documents and answers. In modern transactions, these are exchanged through a virtual data room. The due diligence findings inform the warranty negotiations — areas of concern become specific warranties or indemnities in the SPA.

Sellers should be prepared for due diligence to take 4–8 weeks and to require significant management time. Common issues that surface and slow things down: incomplete statutory registers, missing IP assignments, contracts that require consent to transfer, undisclosed litigation, and PAYE/VAT irregularities.

6. Negotiating the transaction documents

The buyer’s lawyers draft the primary transaction document (SPA or APA). Negotiation then focuses on:

• Price adjustments — locked box vs completion accounts mechanisms. Under a locked box, the price is fixed by reference to a balance sheet at a historical date; under completion accounts, the price is adjusted after completion by reference to actual completion-day figures. Sellers prefer locked box (certainty); buyers sometimes prefer completion accounts (accuracy).
• Warranties — statements of fact about the business (e.g., “the accounts give a true and fair view”; “there is no material litigation pending or threatened”). If a warranty is breached, the buyer has a claim against the seller for the difference in value.
• Indemnities — specific protection for known issues. Unlike warranties (where the buyer must prove loss), indemnities are pound-for-pound payments if the indemnified event occurs. Used for specific tax risks, litigation, environmental issues.
• Limitations on liability — sellers push hard on caps (total liability capped at, say, the purchase price), time limits (claims must be notified within 18–24 months), and de minimis/basket thresholds.
• Restrictive covenants — the seller agrees not to compete with the business for a period after completion (typically 2–3 years, within the geographic market).

7. Conditions and completion

Some transactions are conditional — the buyer won’t complete unless and until certain conditions are satisfied (e.g., key customer consent, regulatory approval, TUPE consultation). Once conditions are satisfied, the parties sign the final documents and completion takes place. The buyer pays the purchase price; the seller delivers the business.

How businesses are valued in M&A

Valuation in SME M&A is typically based on a multiple of EBITDA (earnings before interest, tax, depreciation and amortisation). The multiple depends on: the sector, the growth trajectory, customer concentration risk, management depth (is the business too dependent on the founder?), recurring revenue, and general market conditions.

A profitable, growing business in a stable sector with diversified customers and strong recurring revenue might achieve a multiple of 5–8× EBITDA. A business with a single dominant customer, founder-dependent operations, or volatile margins will achieve a lower multiple — or struggle to find a buyer at any price.

Other valuation approaches used in specific contexts: net asset value (for property or investment businesses), revenue multiples (for high-growth SaaS businesses with low current profits), and discounted cash flow (in more sophisticated transactions).

Earn-outs and deferred consideration

Buyers often want to link part of the purchase price to the business’s future performance — paying a base amount at completion and a further amount if the business hits agreed targets over 1–3 years post-completion. This is called an earn-out.

Earn-outs sound commercially sensible but are a frequent source of post-completion disputes. The seller (now working for the buyer) may feel the buyer is managing the business in a way that undermines earn-out performance. The earn-out metrics need to be defined very carefully — revenue, EBITDA, gross profit — and the seller needs protections against the buyer deliberately manipulating them.

Get detailed legal advice before agreeing earn-out mechanics. What looks like a £5m deal with a £2m earn-out can effectively become a £3m deal if the earn-out provisions aren’t negotiated properly.

Warranties and indemnity insurance

In larger transactions (typically £5m+ enterprise value), it has become standard to use Warranty and Indemnity (W&I) insurance. This is a policy taken out by the buyer (or occasionally the seller) that covers warranty claims, effectively moving the risk from the seller to the insurer. It allows sellers to receive clean exit proceeds rather than leaving money in escrow, and gives buyers a deep-pocketed counterparty for claims.

W&I insurance is increasingly available for smaller transactions (£2m+), though premiums (typically 1–2% of the policy limit) need to be factored into deal economics.

What can go wrong — common deal problems

Undisclosed liabilities surfacing in due diligence — often tax issues, undisclosed litigation, or employment liabilities. These can kill deals or lead to price renegotiation. Sellers should have their house in order before going to market.

Key customer or supplier dependency — if a single customer accounts for 40%+ of revenue and there’s no long-term contract, buyers will either walk away or price the risk heavily into the deal structure.

Founder dependency — if the business is effectively the founder’s personal relationships, buyers will want extended earn-out periods and restrictive handcuff provisions. Think about building management depth before a sale.

Completion accounts disputes — the period between signing and completion (and post-completion under a completion accounts mechanism) generates disputes in a material percentage of transactions. Locked box mechanics reduce this risk.

TUPE complications — in asset purchases, employees must be informed and consulted before transfer. Failure to comply with TUPE consultation requirements creates liability that the buyer may inherit depending on how the obligations are allocated in the APA.

Deal fatigue — SME M&A processes regularly take 6+ months. Management distraction during this period affects business performance, which can then affect price or give the buyer grounds to renegotiate.

Do you need a lawyer for M&A?

Yes. M&A is not an area to navigate without specialist legal advice. The financial stakes (and the long-term consequences of poorly negotiated warranties and indemnities) justify the cost.

For smaller transactions (below £500k enterprise value), some deals are done with light-touch legal support — using template documents with some adviser involvement. But even here, the warranty schedule and limitation provisions need careful attention.

We connect UK businesses with specialist M&A lawyers through our legal advice service. If you’re considering a sale, acquisition, or have received an approach, get in touch here.