Buying & Selling A Business – What You Need To Know From A Legal Perspective

For any business person, purchasing an existing business enterprise, or selling your own is both exciting and nerve wracking. Until the keys are handed over, contracts completed and the money in the bank, there is the potential for matters to go wrong at any stage with no guarantee that the deal will survive.  But if handled diligently by an experienced business law Solicitor, you can be assured that you have the best chance of a successful transaction being achieved.  It is with that experience of buying and selling businesses of all sizes and in all sectors which will prompt your Solicitor to notice subtle but important anomalies and raise relevant questions from the information available, leaving no stone unturned.

As a purchaser or vendor, however, it is useful to understand the process you are about to embark upon, so while your Solicitor is managing each step for you, you can also ask the relevant questions, understand the options available based on the details provided.  ‘Forewarned is forearmed’ as they say.

The key stages involved in the purchase / sale of a business concern are as follows:

Stage 1: Prior to the sale

Before the process can get underway, it is important to determine how the business will be sold.  Broadly speaking, the two options are:

The method of sale carries considerable benefits and implications for both purchaser and vendor.  For example, when selling using the assets-only method, the vendor can elect to retain parts of the enterprise, but when making a share-based purchase, the purchaser may discount the value of the offer being made for the business to account for any risks they are taking on.

For a vendor, the cleaner method is typically a share sale as the business, in its entirety, is usually sold. On the other hand, a purchaser typically favours an asset-only purchase, as they are able to cherry-pick the business assets and the vendor is therefore often left with the overhang of certain liabilities and the process of formally winding up their own business (particularly if the vendor trades as a Limited Company or Partnership).

Stage 2: Heads of terms, confidentiality and non-disclosure

Once the model of sale/purchase has been agreed, a number of other agreements will need to be drafted and signed.  It may be necessary to enter into a non-disclosure/confidentiality agreement before proceeding to the formal Heads of Terms, which often dictates that the parties are not to discuss the terms of the agreement with third parties.

The ‘Heads of Terms’ is a non-binding agreement in principle, which sets out the main terms of the sale, what is included, how much is to be paid, agreed dates, pre-conditions, warranties, indemnities, obligations, exclusivity, and non-solicitation provisions.  While Heads of Terms are not intended to be binding on the parties, they do provide the basis for the sale to be documented and agreed so it is important that they are as detailed as possible as it can be very difficult to re-negotiate terms once they have been agreed in principle.

Stage 3: Due diligence

The due diligence stage provides the opportunity for the purchaser to seek detailed information from the vendor regarding the business, including: financials / accounts, compliance, market conditions, operations, contracts, employees and property, to name a few.  The goal of this phase is to uncover the mechanics of the business and will often highlight any problems or unforeseen liabilities which could materially impact the decision of the purchaser to proceed.  Indeed, the sale/purchase of any business typically hangs on the outcome of the due diligence stage. It is vital that a vendor prepares for this stage by enlisting the assistance of their accountant and other third parties who may have an interest in the business, particularly if supplier contracts are to be assigned or properties are to be transferred.

Stage 4: Contract of Sale (Agreement)

Assuming the purchaser wishes to proceed, the next step is to make the arrangement legally binding by drafting, negotiating and entering into a Contract of Sale agreement.  It is essential that this agreement be drafted by a lawyer specialising in business transactions of this nature, as they will ensure that the legal and financial interests of both buyer and seller are faithfully represented and the spirit of the agreement is upheld.  The agreement will cover key aspects of the sale/purchase including: the final purchase price, the process and date of completion, how payment will be made, warranties of the purchaser and vendor (i.e. assurances made by one party to the other that specific facts or conditions are true), conditions, disclosures, employees, transfer of third-party contracts, property interests and the governing law.  When drafting the agreement of sale, it is imperative the vendor ensures the warranties stated are wholly valid and correct; otherwise there exists a possible risk of a claim for damages.  Equally, the purchaser should do all they can to ensure that all warranties are included and clearly stated from the information gleaned during the due diligence stage.  The document will be signed by the purchaser and vendor in the presence of a witness.

On the day of completion the parties will typically meet in person or agree to complete the documentation over the phone and the vendor and purchaser will need to make proper arrangements to ensure a smooth transition of the business (i.e. by preparing bank mandates if necessary, transferring any intellectual property, handing over keys and passwords, etc). It is not unusual for the vendor to agree to stay on after the business sale for a limited time to ensure any practicalities of the transition can be dealt with efficiently and in the proper manner.

Final tips for a successful business sale/purchase

Regardless of how many businesses you have purchased or sold, or if this is your first time, seeking professional advice from a specialist business law Solicitor will make the difference between a successful transaction, and one that risks costing both parties dearly in terms of time, money, and stress.  Before committing to buying a business, the prospective purchaser should do as much due diligence and information gathering as possible.  This research will pay dividends, as it enables you to ask the correct questions up front and find a business which is going to meet your commercial ambitions.  And most importantly, take your time.  Ignore the pressure to commit to a deal, because ultimately, doing so when you are not ready could cost you your livelihood.  After all, remember, ‘only fools rush in’.

Please note, this article does not constitute legal advice.

Hart Reade Solicitors are a full-service law firm with offices in offices in Eastbourne, Hailsham, Polegate and Meads.  We hold a both a Lexcel and Conveyancing Quality Accreditation from the Law Society of England and Wales, as well as being an ALEP member.  To make an appointment with one of our business law Solicitors, please phone our office on 01323 727 321.