How we can help
The key to a successful business purchase is to seek legal advice early. Our solicitors can help you with every step of buying a business, including:
- Carrying out due diligence. This is the process of investigating a business’s assets and liabilities.
- Assisting you with agreeing Heads of Terms for the purchase.
- Advising you about employment law. This covers the legal obligations you will have towards transferring employees.
- Reviewing and negotiating the acquisition agreement. Acquisition agreements set out the terms of business sales and purchases.
- Transferring money, the lease agreement and other relevant commercial contracts from the seller to you.
- Carrying out post-completion work. This could include identifying whether any changes need to be made to the business in light of covenants in the acquisition agreement.
Business acquisition structure types
When you buy a limited company, you will purchase either the business’s assets or shares. The type of purchase you make might be based on tax considerations, but other factors also come into play.
A business’s assets might include tangible assets like commercial property and stock and intangible assets such as intellectual property. As a buyer, you decide what assets you wish to buy. You do not take on any liabilities of the business unless you decide to do so.
However, under Transfer of Undertakings (Protection of Employment) Regulations 2006 (also known as ‘TUPE’), employees of a business automatically transfer when a business is sold. In addition, their employment terms remain the same.
If a business is operating from a leasehold premise, the lease for the commercial property might be assigned to you as the new business owner, but it depends on the landlord.
When you purchase business assets, you sign an Asset Purchase Agreement with the seller, which sets out the terms and conditions of the sale and purchase.
Asset purchases tend to be more popular than share purchases because they are more flexible. However, identifying business assets and transferring them to business buyers can be complicated.
With a share purchase, you buy an entire company, which includes all assets and liabilities. This means you need to make sure you are aware of the liabilities you are taking on and the implications.
By purchasing a whole company, you take on everything, including the business’s registration number and credit history. There are more risks involved in a share purchase than an asset purchase, so you are likely to seek more warranties from the seller.
Warranties set out a business’s assets and liabilities in detail. If there are any mistakes or untruths in the warranties, the seller may have to compensate you for any losses you suffer.
Unlike an asset purchase, you will automatically acquire any property interest the company holds.
What's the process of buying a business?
Here is an overview of the legal steps to purchasing a business:
The seller may not want employees or other parties to know they are selling the business until the sale has been completed. Therefore, as the buyer, you may be asked to sign a confidentiality agreement. It is important to seek legal advice before you sign to make sure the terms are reasonable.
Heads of terms
The heads of terms set out important details such as the agreed purchase price of the business. A lock-out period is normally agreed in the heads of terms which gives you exclusive rights to purchase the business for a set period of time.
Your solicitor will ask the seller’s solicitor for specific information about the business’s assets and liabilities. This might cover finance, the corporate structure, employment contracts, intellectual property rights, details about customers, disputes and more. The information requested will depend on the type of business being purchased.
The results of due diligence might mean you take one of the following actions:
- Decide not to go ahead with the purchase.
- Negotiate the purchase price.
- Decide to protect yourself from liabilities through clauses in the acquisition agreement.
Share purchase agreement or asset purchase agreement
The share or asset purchase agreement covers the terms of the transaction, such as the sale price, any approvals needed before purchase completion and more. It will also include certain aspects to protect you as the buyer, such as:
- Restrictive covenants. These covenants stop the seller from taking specific actions, such as poaching important clients.
- Indemnities. The seller may be required to compensate you for any liabilities you inherit from the business.
- Warranties. These are guarantees the seller gives to you as the buyer. For example, key employees have not given notice to terminate their employment. Inaccurate information can result in the seller being sued. The seller might try to reduce the likelihood of claims against them by imposing time limits by which you can make a claim.
All necessary side documents are drafted, such as stock transfer forms, directors’ resignation letters, board minutes approving the transaction etc.
Your solicitor will negotiate and agree on these documents and the share purchase agreement with the seller.
In this letter, the seller discloses any issues with the business. Your solicitor will check and amend the disclosure letter as necessary.
By signing this agreement, you agree not to make a warranty claim against the seller for anything they have disclosed. The contents of a disclosure letter may mean you renegotiate the price of a business.
Report to the lender
If you have borrowed money for the purchase, your solicitor will report to your lender once they are happy. Your solicitor will also act for your lender and carry out due diligence on their behalf.
Once the contracts are signed, funding is transferred, and the purchase completes.
Sometimes there is a gap between signing the acquisition agreement and completion because there are issues to be addressed. For example, transferring employees may need to be informed or approval for the purchase received from a regulatory body.
Your solicitor may carry out the following tasks after completion:
- Update the company books with Companies House.
- Pay stamp duty on any shares (in a share purchase).
- File relevant documents with the Land Registry.
If you have taken out a loan to buy the business, your solicitor will ensure all documents are filed to meet your lender’s conditions.
What are the risks of purchasing a business?
There are many risks to consider when buying a business, including:
- Employees. Under employment law, existing employment contracts remain the same when you purchase a business. You may also have to take over the company’s existing pension scheme, which could have implications for you.
- Key employees. If key employees leave when you take over a business, then the business may lose value. You may want to consider how to tie in or incentivise these staff members.
- Intellectual property rights. The most valuable asset of a business may be its trademark or brand. It is important to make sure the rights can be transferred to you as the new owner.
- Contaminated land. If you buy contaminated land or purchase a business that has allowed land to become contaminated, you could face legal consequences.
- Shared assets. If a business shares any assets such as equipment or insurance with another company, then additional legal agreements may need to be put in place.
- Disputes. If you buy a limited company you will inherit any disputes, and financial issues such as tax issues.
Third party consent. The purchase of a business may be subject to approval from an industry regulator or shareholders. Contracts may have to be assigned in an asset purchase and there may be change of control provisions in contracts which are triggered by a share purchase.
Our solicitors at Parkinson Wright can advise you on how to mitigate or eliminate risks when you purchase a business.
Why choose Parkinson Wright solicitors for buying a business?
At Parkinson Wright, we know that every business purchase is different, and we tailor our advice to your business objectives. Our experienced business solicitors handle transactions for a wide range of business types and business sizes every day.
We can guide you through every step of your transaction, answering all your questions, offering practical legal advice, and making sure you understand the information you need to make the best decisions. We will aim to complete your transaction cost-effectively and within your timescale.
Parkinson Wright's corporate team have a number of accreditations, so you can rest assured you will receive the highest quality legal advice and level of customer service.
Solicitors Regulation AuthorityWe are regulated and authorised by the Solicitors Regulation Authority (SRA).
Lexcel Quality MarkWe have achieved the Law Society’s Lexcel Legal Practice quality mark, which sets the standard for client care.
Get in touch
We offer a Free Initial Assessment, so you can receive expert legal advice about your business transaction without charge or obligation.
To arrange your Free Initial Assessment at a time convenient to you, please call 01905 401 893.