Buying a business can be an exciting prospect and a powerful driver of business growth. However, it may seem rather daunting to anyone who is not familiar with the process. Jack Stephenson, a solicitor in Harrison Drury’s corporate team, looks at some of the basics you need to consider.
Share purchase or asset purchase?
The first step is to determine the type of transaction you are entering into. If the business is run as a partnership or sole trader then it is likely that you would purchase the assets of the business, which could potentially include the goodwill, fixtures and fittings and stock. This is known as an asset purchase.
If the business is owned by a company, you have a choice of buying the assets of the company (as outlined above), or buying the shares in the company from the shareholders. Purchasing the shares would involve acquiring all of the assets and liabilities of the company.
One of our previous blogs explores the difference between a share purchase and an asset purchase in more detail.
There are many types of due diligence that you might want to undertake before buying a business, including financial due diligence and legal due diligence.
Legal due diligence varies depending on the type of business you are purchasing. However, it could involve determining whether there are any outstanding disputes relating to the business or its employees or ensuring that the business is not tied into any onerous contracts.
Financial due diligence relates to a review of the financial standing of the business. This is usually undertaken by an accountant or financial advisor. However, a solicitor will ensure any significant findings are incorporated into the legal documentation.
Our previous blog on due diligence explains more about the important role it plays in any corporate transaction.
The terms on which you buy the business
It is always important that key terms are included within the agreement to buy the business. Important provisions might include:
- Warranties: A warranty is a statement of fact by the seller as to the state of the business. For example, a common warranty might be to confirm that there are no outstanding disputes relating to the business.
- Indemnities: If in the course of due diligence, you find out there is, for example, a dispute relating to the business, an indemnity would provide protection against any loss or financial burden you might face as a result of this.
- Post-termination restrictions: These will ensure that the seller is prevented from setting up in competition with your business following completion. It is important that such clauses are tailored specifically to each transaction; otherwise there is a risk that they will be deemed unenforceable.
When buying a business, you may also need to consider whether you are also taking on any property from which the business operates. This could involve a transfer of the existing lease, the grant of a new lease or perhaps a purchase of the property.
If you are buying the shares of a company, any arrangements already in place with the property may continue as the company itself (being the owner of the property or the tenant under the lease) remains the same, it is merely the identity of the shareholders that changes.
Either way, it is important to identify any risks with the property and ensure you are protected against any issues that arose during the seller’s occupation of the property.
When buying the assets of a business, it may be the case that the employees are afforded protection under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). The TUPE Regulations are intended to protect employees in situations such as a business transfer. Under the regulations you will essentially step into the shoes of the previous employer, as if the employees’ contracts of employment had initially been made with you.
Harrison Drury solicitors has a team of experienced corporate and commercial lawyers able to advise on all aspects of buying a business. If you are looking to buy a business and require advice, please contact Jack Stephenson on 01772 258 321.