Buying a business can be one of the most important decisions you make in your life, and there are many factors to consider before signing that final contract. Although every purchase is different, the legal terminology and some of the terms of the agreement will apply to most purchases. Here, we explain to you some of the terminology that may appear in your asset purchase agreement, and help you understand the process involved in the purchase.
An asset purchase is a purchase of all or only some of the assets of a business, and can include, but is not limited to, goodwill, fixtures and fittings, and property. As a buyer, you may also take on some or all liabilities of the business.
It is important to note at this stage that we would expect to work closely with your accountants throughout the purchase process.
Heads of Terms
Once an agreement has been reached in principle on the key terms of a purchase between you and the seller it is common practice to record those terms in writing as heads of terms. Heads of terms are not usually legally binding, but you should seek legal advice on drafting these heads of terms as it is often difficult to renegotiate at a later date.
It is standard practice for a seller to ask you as the buyer to sign a confidentiality agreement to prevent you from using or disclosing the information you receive about the business. Legal advice should once again be taken before a confidentiality agreement is signed as to clarify and confirm the terms you are agreeing to.
Due diligence process
This is an opportunity for you as the buyer to ask questions about the business, and we would recommend this is done as early as possible so that any problems can be dealt with without holding up the rest of the sale.
We will help you ask the right questions to learn as much as you can about the business through a detailed due diligence questionnaire. This questionnaire will cover how the business operates, its assets, employees, contracts with customers and suppliers. We will analyse the information given by the seller and report back to you, identifying any problems and advising you how best to deal with them.
Other questions we are frequently asked regarding due diligence include:
Are there different types of due diligence?
There are; an accountant will undertake tax and financial due diligence and we as solicitors will handle the commercial and legal side. Specific, more in-depth, due diligence can be done on the most important things, which we will explain to you at the time.
What can I do if I discover problems?
You have many options in this situation; you may pull out of the deal, renegotiate terms and price, ask the seller to resolve the issue before proceeding or accept that you are taking the business with that problem. Your bargaining position will dictate your range of options, an area we can advise you on should you discover a problem.
Are there any common problems that due diligence tends to identify?
The most common problems tend to involve employees, property, environmental matters and pensions, all of which we can either advise you on personally, or refer you to our colleagues in our Employment and Commercial Property teams.
How long does the due diligence process last?
It depends on the size and complexity of the business and usually the value of the transaction. Questions can be asked of the seller any time before completion and therefore due diligence may last the entire length of the transaction. However, the initial and most intense stage for deals with a value of less than £5million tend to last between a fortnight and a month from beginning to end.
The asset purchase agreement
This is the key document in the sale and is usually drafted by us as your solicitor. The key provisions are:
Full warranties (i.e. assurances given to a buyer) relating to the assets being sold are usually included in the agreement. The warranty schedule is usually very lengthy and is heavily negotiated.
Purpose of warranties: As the buyer, you have little protection if the deal turns out not to be what you expected. Warranties “flush out” potential problems so that they can be negotiated and dealt with before the purchase is completed and warranties also enable you to obtain compensation if the business is not as the seller warranted.
The effect of warranties: Warranties impose a legal liability on a seller to give complete and accurate information on the business. If a seller makes inaccurate statements about the business, as a result of which its value is reduced or you suffer a loss, you may have grounds to sue the seller for damages for breach of warranty. In effect, warranties give you the opportunity after completion to adjust the price.
Who gives the warranties: Usually the seller, however if there is more than one seller, you will usually require the seller to give the warranties “jointly and severally” which means that each of the sellers is responsible for the full amount of any claim if the warranties are not correct. In practice, you can sue whichever seller you consider is more likely to be able to meet a warranty claim for the full amount of that claim.
Where the seller is a company, the company gives the warranties, but the shareholders may also be asked to give warranties personally to reinforce the company’s warranties, especially if the company will have little substance post completion.
The scope of the warranties: The warranties are drafted by us as your solicitor, usually on the basis of information gained from due diligence. The warranties are usually general, wide and as far reaching as possible.
Limiting the warranties: Due to the potential effect of the warranties, the sellers’ solicitor will try to limit their exposure by deleting those warranties which are not applicable, qualifying some warranties “so far as the seller is aware” and drafting specific limitations on the sellers’ liability.
Typical limitations include:
- limiting the amount of any claims that can be brought by you to a maximum sum (very often the purchase price)
- limiting the timescales within which a claim must be brought
- excluding small claims
- forcing you to do what you can to reduce any loss you have suffered
- disclosing exceptions to the warranties in a “disclosure letter”
If you know about a potential liability, the seller may be required to indemnify you against any loss. An indemnity effectively provides pound for pound compensation for your actual loss for breach. If there is no indemnity, then you would need to sue for breach of warranty and your claim would be subject to all the restrictions under general law on claiming damages for breach of contract. From your point of view an indemnity is more valuable.
A number of consents or approvals are likely to be required on an asset purchase. For example, if a business occupies leasehold property, the landlord’s consent to an assignment will be required.
Apportioning the price between the assets
We would also recommend you take advice from your accountant on the apportionment of the price as between the various assets being purchased so that you fully understand the tax consequences of the purchase.
When buying a business, the employees of the business transfer to you as the buyer on their current terms of employment. This is the effect of TUPE (“Transfer of Undertakings (Protection of Employment) Regulations”). Generally, the seller will be liable for claims regarding any failures in respect of employment obligations to employees up to completion and you for anything after completion. As this is a complex and fast changing area of the law we can put you in touch with our Employment Team on the way in which TUPE may impact on your purchase.
If a property is being purchased you will need to take advice from and involve a member from our Commercial Property team.
This is a very important document as it lists any exceptions or inaccuracies in the warranties, for example, the seller may be asked to warrant that “the company is not involved in any litigation”. If in fact it is, the details should be disclosed. All the disclosures are collected together in this “disclosure letter”.
The disclosure letter protects the seller because if they properly disclose anything inconsistent with a particular warranty, they cannot be sued for breach of that warranty. The disclosure letter will be reviewed and approved by us in consultation with you and by your accountants.
These are the copy documents which relate to any matters disclosed in the disclosure letter. In the example given previously, these could be copies of the court papers and correspondence concerning the dispute which led to the litigation.
Essential questions before buying a business
We hope we have given you insight here as to the process of buying a business and how we can guide you through the process. There are more factors for you to consider however, which reach further than legal terminology and process:
How does the business generate its income?
This is likely to be covered within the due diligence, but you will need to consider where the main revenue of the business is generated; a business reliant on a few customers for the majority of its income is generally more fragile than one with a more even spread. If there are key customers and relationships that need to be maintained, you will need to check whether there are adequate and appropriate contracts in place.
Are your family supportive?
Buying a business will naturally impact your home life; it’s important that you discuss with your family the likely consequences on working hours, stress and finances.
Why is the seller really selling?
Again, this may be covered in due diligence, but if not it is important you know of the real reasons why the seller is selling. If they are not forthcoming, do your own research about the company and the local area, and feel free to challenge what you are told. The seller may also be pertinent to the success of the business; people buy people as the phrase goes, so you will need to ascertain whether business will leave with the seller.
What value can you add?
This could be in a variety of ways, whether it be to re-energise a lethargic business and its staff, or with the introduction of more efficient processes, financing new equipment, entering new markets, or exploring new technologies and marketing opportunities.
What value can your business add?
Assuming you’re already in business, your customer base might be complimentary; there might be staff savings and an opportunity to win new work or bigger contracts via improved customer perception.
Is the timing right for you?
You will need to take into account your current business ventures and the impact on your wider life, taking into consideration whether you have the necessary skills and experience for that particular business.
How will you finance it?
This is one of the most important questions you need to ask yourself. You will need to finance the business purchase and any changes, even though sellers are increasingly willing to accept instalments over several years, sometimes interest-free.
Is the timing right for the business?
As well as looking at opportunities, you should also review the potential weaknesses or threats to that business; what is happening in the market, what are the activities of your competition, are there any regulations that will impact the business now or in the future, and are there changes in customer and supplier trends.
Why not start a similar business from scratch?
If you have a found a business you would like to buy, it may be more prudent for you to set up your own business instead of purchasing a readymade one, where the cost cannot always be justified. You will need to evaluate what it would cost you in terms of time, money and effort to establish a similar business and review the particular barriers to entry for that particular market.
We appreciate there will be many elements to consider when buying a business, and we have many years of experience helping people achieve their goals for their business sale efficiently and keeping you at the centre of the process. To discuss your business purchase with a member of the team, contact us:
Steven Grant on 023 8071 7445 or email email@example.com
Naushad Rahman on 023 8071 7409 or email firstname.lastname@example.org