The Essential Legal Requirements in Buying a Business
The Essential Legal Requirements in Buying a Business
Buying a business is far more complex than purchasing most other assets – and it’s highly advisable to seek legal guidance to ensure you’re confident that you’ve ticked all the boxes.
For example, the purchase itself might not be straightforward:
- Are you buying the business entirely, including all operations, branding, goodwill, equipment and intellectual property?
- Or, are you purchasing business shares – and, if so, does that mean you’re buying ownership but not the assets involved in running the company?
While that might seem like a technical difference, it could be fundamental to your position as a business investor and impact things like your liabilities, obligations and returns.
Today The Law Firm Group explains some of the multiple decision-making factors when buying a business and how to inspect each aspect of the purchase from a robust legal perspective.
Due Diligence on Business Acquisitions
First, before any contracts are signed, you’ll want to conduct due diligence.
That includes identifying any underlying issues with the business, which may be glossed over in the sale particulars.
There are lots of resources and options available to get a feel for the company and perhaps reinforce your understanding about why the current owner wishes to sell:
- Researching the market – is demand stable, are the products or services likely to become redundant, is there sufficient opportunity for expansion or diversification?
- Assessing the competition – are there an overwhelming number of rival businesses, or is the market flooded with competition that makes ongoing profit unlikely?
- Investigating price stability – can you realistically expect stable or increased revenue, or are prices and margins volatile and subject to sudden changes?
This stage is similar to a risk assessment and is key to making sure you have a firm grasp of the future business prospects before making a confirmed offer.
Determining Legal Actions Around Contract Transfers
If you’re buying company shares, this won’t typically require legal work around contracts held between the business and third parties.
However, if the purchase constitutes a full business acquisition, multiple contracts may need to be assigned or transferred to you as the buyer.
- Landlord’s or mortgage lender’s consent
If the business operates from a leasehold property, it must often assign the lease to the new owner by liaising with the landlord.
Likewise, a mortgage agreement may require renegotiation depending on the trading structure and whether the current owner has a guarantor or personal guarantee in place.
- Contracts of employment
Many business investors will look for opportunities to maximise efficiency and transform a company into a more profitable enterprise.
Employment contracts are protected under the Transfer of Undertakings Regulation 2006 (TUPE).
Therefore, you’ll need to assess the terms of employment currently in place and seek legal advice if you have any intention of revising those contracts.
- Commercial contracts
Businesses tend to have contracts to supply goods or services and for inbound purchases. These contracts may not necessarily transfer along with other business assets.
Third parties may have a right to cancel or rescind a contract, and therefore preparing the ground before the sale is important so that you as a buyer will continue to benefit from these agreements.
Legal Paperwork Required for a Business Purchase
Another essential factor is to ensure you have access to all of the core business acquisition documentation for perusal by an experienced solicitor or lawyer before you go ahead.
Normally, that might include an exclusivity agreement, which gives you a specified period to conduct sufficient investigations without the seller seeking another buyer or negotiating with another interested party.
Exclusivity can be included as part of the general sale terms.
Still, it can also be a standalone agreement, which means you have the comfort of a time cushion to carry out all the required assessments.
Confidentiality agreements are also typical and protect the commercial sensitivity of a business sale or ownership transfer.
Buyers must scrutinise every element, including finances, debts and assets. Confidentiality is often a condition of sale and ensures that a potential ownership change is not leaked too early in the process, causing concern and disruption.
As always, we’d suggest seeking legal advice before committing to any obligations outlined in a confidentiality agreement.
Disclosure letters normally cover a broad scope and include things like:
- Liability limitations
- Restrictive covenants
- Tax indemnities
You’ll also need to know about the exit strategy of the seller and whether, if you buy a business through a share purchase agreement, that incorporates all of the assets and obligations associated.
Therefore, share purchase agreements should include all of the information as in a disclosure letter to ensure you are legally covered and understand the purchase structure.
Further, you’ll need to know whether the purchase of the assets constitutes a taxable supply, subject to VAT.
Usually, you won’t be liable for additional VAT charges, provided you’re buying the assets to continue carrying on the business or where you’re buying a separate branch of a company that can operate independently.
Understanding the Legal Aspects of Business Purchase Agreements
Once you’ve carried out comprehensive evaluations, agreed on pricing, and a payment structure, the next step is to work through the business purchase agreements and contracts.
Note that payments may be complex and often include a blend of share transfers. This agreement requires legal guidance if you are paying other than via an outright cash investment, so there is absolute clarity for both parties.
We’d typically recommend pushing for completion as quickly as possible since a seller may lose interest in managing the day-to-day operations, so it is beneficial for the buyer to gain control promptly.
However, the costs of business investment mean that it will pay dividends to take care over inspecting each contract before proceeding:
- Acquisition agreements define the purchase terms and itemise the sale details, including time frames, warranties, and other specifics that the seller should include in the initial disclosure.
- Asset agreements, setting out each asset, such as stock, machinery, creditors and debtors, staffing, client contracts, assignment deeds for lease contracts and landlord consent where applicable.
Finally, the completion documents should follow a set schedule since you’ll need to organise a range of practical actions such as preparing board minutes for share transfers, organising VAT, PAYE and National Insurance obligations, and other formalities.
It may sound that there is a vast amount of documentation and research, but methodically progressing through each of these steps is important to ensure the business purchase runs smoothly and you have access to all the information you require to make clear decisions.
Having the right legal advice can remove much of the legwork, with an experienced solicitor to review each contract and provide independent advice to protect your position.
For more information about securing your legal interests during a business acquisition or any advice about the sale processes listed here, please get in touch with The Law Firm Group for bespoke support from the legal experts.