When purchasing a business in the UK, careful consideration must be given to a multitude of aspects. No business is the same, meaning that each purchase will require tailored advice from a team of experienced professionals.
Your solicitors will provide support and advice throughout the transaction. They are responsible for drafting key transaction documents such as the share purchase agreement or asset purchase agreement (known as the SPA) and the disclosure letter.
Lawyers will also drive the due diligence process, often with the assistance of financial advisers and tax specialists/accountants, as may be required.
1) Who are you buying from?
Perhaps the most important part of any business purchase transaction is the due diligence procedure. The outcome of this process is for the buyer’s benefit, to understand more completely what they will be getting themselves into by purchasing the business.
The buyer’s solicitor will ask the seller a series of key questions regarding the target company, so that any latent issues are revealed. If the seller provides false information, the buyer will usually be able to seek recourse from the seller for breach of contract after the transaction has taken place.
The due diligence questionnaire should be sufficiently broad, and your solicitor will manage this process, with your input where required.
2) Is it best to purchase the entire company, or just certain business assets?
Buyers have the option to purchase the shares of the company, or the assets only. There are benefits of both options and the option that is best for you will depend on the target business in question.
For example, you may initially intend to purchase the shares of the company, but then decide that an asset purchase is more suitable, following the results of the due diligence exercise that have revealed creditor liabilities.
Purchasing shares is usually considered the more straight-forward of the two, because you simply purchase the entire issued share capital of the company and take the whole company on, debts and all. Conversely, a typical asset purchase allows the buyer to cherry-pick the assets of the business and leave unfavourable liabilities with the seller.
3) Are the company books and records up to date and accurate?
The company records (also known as the statutory books) tell the story of a company from the date of incorporation to present day. This is where you will hopefully find a complete set of company registers, including the register of members, share registers, register of directors and register of persons with significant control.
Any historical change of company details should be recorded here. Your solicitor must flag gaps to the seller for further investigation.
4) What are the property considerations?
Your day-to-day solicitor is likely to be a company law specialist. Many law firms will have an in-house property team, equipped to review property law matters. They will be able to review the commercial lease on the property (or conveyance if the
business owns the freehold) and advise on key terms, which may include rent, service charge, business use and outstanding charges on the land.
5) What are the payment terms?
The buyer and the seller will agree on a purchase price. How this is to be paid will be determined in the SPA, usually in the completion schedule. Upon the seller satisfying certain obligations, the buyer’s principal obligation will be to pay the purchase price.
This may be payable in one lump sum, in instalments or even calculated at a later date, subject to performance of the business.
6) Is additional specialist advice required?
Some transactions are more complex than others. Your lawyer will be able to advise you when additional specialist help is required. An accountant can conduct due diligence on the company’s financials. A valuation agent can check you are purchasing the business at fair market rate. Brokerage, insurance and tax professionals may also be required.
Remember though, it is always prudent to check the credentials of professionals working for you. For example, you can check a solicitor’s details on The Law Society ‘Find a Solicitor’ online service.
Blog by Matthew Hernon, UK Account Manager BusinessesForSale.com