Buying and Selling a Business

Whether you are buying or selling, the structure and timing of a business deal will hinge upon a number of important factors and it is often integral to the success of a transaction that early advice is sought. This article  on Buying and Selling a Business aims to guide you through some of the most important steps to consider as part of the overall deal. And discusses some of the more common questions we come across.

Structuring a deal

Before any terms can be agreed, it is vital to consider whether the proposed transaction should proceed as an “asset-only” deal, or by way of a “share sale and acquisition”.

If the seller operates as a sole trader or partnership, then the only option available is an asset-only deal. However, if the seller trades as a limited company, an agreement may be made to sell the share capital in the company instead.  There are advantages and disadvantages to both. Depending on whether you are buying or selling, some of which are noted below:

Asset-only deal

The advantages, broadly speaking, are as follows:

• The buyer can “cherry-pick” the assets that it wants to purchase
• The transaction is often simpler, less expensive and less complicated from a legal perspective
• If the seller trades as a limited company and only sells its assets, the directors will be left with a company with potentially no assets. The formalities for winding up the company may need to be addressed. The directors will also have to bear in mind the company may still owe certain liabilities
• The buyer does not inherit any of the company liabilities
• The buyer will be required to pay Stamp Duty Land Tax on the acquisition of property only

Some disadvantages to this structure are as follows:

• All staff may need to be transferred to the buyer under the TUPE Regulations. Which can add a layer of cost and complexity
• Leasehold premises may need to be formally assigned and landlords consent will often need to be obtained first
• The parties will need to consider whether VAT should be charged on the transaction
• The seller will need to consider how best to extract the cash from the proceeds of sale if trading as a limited company

Share deal

In respect of a share deal, the advantages are as follows:

• As a seller, it is a cleaner structure as the shares in the company pass to the buyer (along with any obligation and liabilities). The company then continues trading under new ownership
• Any contracts continue as before without the need to be assigned
• TUPE does not apply as staff remain employed by the company
• The benefit of offsetting tax against company losses may be applied

Some of the disadvantages are as follows:

• The due diligence process is often much more involved and more complicated as the company must be looked at as a whole;
• The buyer assumes responsibility for all company liabilities and does not get to “cherry-pick” the assets it wants;
• The buyer will pay additional Stamp Duty on the purchase price paid for the shares;
• The seller may be required to keep back a retention from the sale proceeds to protect the buyer against certain liabilities.

Agreeing Terms

Once the structure of the deal is agreed, the parties must then consider any relevant or specific terms that need to be covered under the Contract and formal Heads of Terms are usually prepared.

The Heads of Terms should set out the basis of the agreement. It cannot be stressed enough how important it is to get these right before committing to the deal.

The Heads of Terms should deal with the main aspects of the business, such as:

• The purchase price (and how it is split between any property, assets, inventory, shares, goodwill, etc);
• The deposit payable on exchange of contracts;
• Whether any stock is to pass on completion and how this is to be valued;
• The covenants being given by the seller on completion and what restrictions are to take place;
• What the process is following completion to ensure a seamless transfer;
• Who is to pay for any third party costs (i.e. landlords, where consent is required);
• Any specific terms necessary to the particular business (i.e. transferring certain contracts) and the timescales agreed.

Due Diligence

The due diligence stage of the transaction is typically the point where lawyers are instructed to draft and review the Contract. The buyer’s advisors will raise various enquiries and generally delve into the inner workings of the business. The due diligence phase will mainly consist of lawyers reviewing legal paperwork. With the financial advisors reviewing the business accounts and advising on any tax implications.

For the buyer, the due diligence stage is the most crucial element of the transaction. It is often where you get to understand how the business actually operates and uncovers any issues that need to be addressed. Such issues may be important enough to provoke a review of the price being paid. Or whether or not the matter proceeds at all.

A seller will need to engage fully in the process. They can help expedite the matter by gathering all relevant paperwork and information up front. And generally responding swiftly to any enquiries raised. The seller will want to ensure that as much information is provided as possible. So as to limit the possibility of any claims being made under the warranties they provide to the buyer in the Contract.

The due diligence process is therefore a two-way street and the extent of it will vary on each transaction. However, typical disclosures made by the seller during the process will generally include information about:

• Business contracts (i.e. goods and services)
• Employee contracts and pension obligations
• Any on-going or historic claims against the business
• Details of leases and property matters
• Any statutory books and records for the company
• Any intellectual property and associated rights

There may also be information which is business-specific and therefore requiring a more thorough evaluation.

Common issues

Every transaction will have its own nuances but the below highlights some of the more common problems we come across:

• If the asset-only deal includes the transfer of a lease, you should check whether the landlord’s consent is required. The landlord will often require references from the buyer in order to make an informed decision. The buyer should collect these from their suppliers, previous landlords or their contacts at the bank. The landlord’s legal costs will also need to be met so it is important to have that discussion early on and factor that in to the overall price. The buyer may also be required to put up a rent deposit (which is typically 3 or 6 months’ worth of principal rent payable under the lease) and the seller may be required to enter into a form of guarantee, which means it will be guaranteeing the buyer’s obligations under the lease for as long as the lease remains in force, or the buyer sells the business at a later date.
• If the transaction includes the transfer of property generally, then certain documents will be requested, such as: the Energy Performance Certificate and Recommendation Report, the fire risk assessment, an asbestos survey report, electrical installation and testing reports, planning consents and building regulation completion certificates, air conditioning reports and any guarantees and consents applicable to any works carried out. The seller should therefore ensure it provides these documents as early as possible, or attends to the completion of the same to prevent any delays.
• In an asset-only deal questions may arise as to whether any employees need to be legally transferred. The general position is that where certain assets, goodwill and intellectual property is being sold, the TUPE Regulations are often triggered, requiring any existing employees to be transferred to the new business owner with their existing rights protected. A consultation process will need to be held with the employees and early advice sought. Failure to adhere to the TUPE Regulations can come with severe consequences. Reviewing the employment contracts is vital and there must exist, by law, a statement of particulars for each employee. TUPE does not apply to share deals as the employer remains unchanged.
• Any contracts that need to be assigned to the buyer should be checked thoroughly to ensure there are no restrictions on transferring them to a third party, or whether consent of the other contracting party needs to be sought first. This is more common than you might expect and can cause significant delays if not dealt with early on.
• The parties should consider what appropriate restrictive covenants need to be included in the Contract. For example, it is common to see a restrictive covenant preventing the seller setting up a new business within a certain radius of the business that they have just sold. A seller may be prevented from setting up a competing business altogether within a set timeframe to ensure they cannot poach any staff or customers. The nature of the covenants will depend on the particulars of the business.
• The parties should also consider whether VAT is payable on the transaction and advice from an accountant should be sought. Normally the transfer of a going concern is outside the scope of VAT provided the transfer meets the necessary criteria. For a VAT registered business, the buyer will also need to ensure they are VAT registered prior to the purchase to benefit from this exemption.

By being aware of these issues you can plan accordingly to assist with the smooth running of the matter.

Next steps

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.  To make an appointment with one of our business law Solicitors, please phone our office on 01323 727 321.

Alternatively, please complete the contact form below.

Please note, this article does not constitute legal advice and its content may be subject to modification depending on any changes in the law.