This guide sets out the most common key legal issues that will be relevant to most business purchases.
Due Diligence
Due diligence is the name given to the process where you check out the business you are interested in buying to make sure it is sound and is worth the value you are prepared to pay for it. Mostly this will be done prior to solicitors being brought in.Due diligence may involve you checking the condition of the businesses’ physical assets. You’ll want to look at the business accounts and probably get your accountant involved in that as well. You will want to make sure that there is nothing which will adversely affect the value of the goodwill you will be paying for.
While most of the due diligence will usually be carried out before the solicitors become involved, there are a number of issues which your solicitor will look at in more detail. This will usually include matters such as raising numerous detailed questions with the seller’s solicitor and getting detailed technical information for you to consider. Your solicitor might also carry out property searches and certain other technical legal enquiries that could affect the legal position or validity of the business.
Heads of Terms (or Memorandum of Sale)
Heads of terms are sometimes called a memorandum of sale. This is a document which sets out a list of the main key terms and information concerning the agreement made between you and the business seller. The document is usually not legally binding as such but is an agreement in principle. It is the main terms that you’ve “shaken hands on” but nearly always subject to legal contract later on. This means that all parties are free to pull out or attempt to renegotiate at any time until a formal contract is sign up.The heads of terms (or memorandum of sale) is in most cases drawn up by the sellers business transfer broker / agent. The exception is in business transfers that are much larger and more complex than usual. In cases such as that, solicitors may be involved in drawing up heads of terms, but this is very much the exception.
Although heads of terms are not legally binding, the parties and the agent / broker consider them to be morally bindings and usually don’t take kindly to any substantial attempt at renegotiation. So its important that you make sure you’re happy before you put your name to them. It is advisable to get your solicitor to have a quick look over the draft heads of terms before you agree them.
The heads of terms document will list such matters as the details of the parties and their solicitors. The document will set out the sale price; what assets are being sold and what assets might be excluded from the sale. There will usually be a proposed completion date; outline of employees; stock; details of the lease and the Landlord's details and any other particular features the parties might have agreed to.
Instructing Your Solicitor
It is usually after the heads of terms that solicitors are given formal instructions to sort out the legal process. As we say above, it is always a good idea to get some legal advice before you "shake on" the heads of terms. The heads of terms, once agreed, are circulated to the solicitors and they then use this as a basic guide to help them with the contract and sorting out all the other things involved.Different solicitors deal with things in different ways, at NA Legal we would at this point write to the seller’s solicitor with a detailed list of all the documents and information we need from them to enable us to do what we need to.
The Contract
It is usual for the seller's solicitor to draw up the first draft of the business sale contract. Even in the sale of straight forward business sales, the contract will be quite a complex legal document. Because every business being sold is different, every business sale contract is different.The first draft prepared by the seller’s solicitor will be drawn up in favour of the seller. Your solicitor will make amendments and additions to put the balance back towards your favour and make sure that your interests and priorities are dealt with properly. The final version of a contract may be very different from the first draft.
There are of course several very important purposes of having solicitors work on a contract that eventually everyone can agree on. Having a written contract fully and accurately explains what is happening, what is included in the sale and, equally importantly, what is excluded. The contract will fully define the legal rights and obligations of both parties. Where there is an agreement but the rights and obligations are not properly legally defined, then that is where disputes arise and any agreement may turn out to be worthless. Also very importantly, the contract defines the change in legal ownership of assets. It actually gives effect to a change in legal ownership meaning that you, as the buyer, then own the assets you are paying for.
The contract has to be right, otherwise you could easily find that after you've paid a large amount of money, you find that legally you don’t actually own what you though you were paying for. Such a situation could easily ruin your life for years, so its obviously a very good idea to have a solicitor with the expertise to work on your behalf to make sure the contract which is watertight and covers all the bases for you.
Restraint of Trade Clauses
These are some specific types of clauses which you will want to be included in the contract and which your seller may want to avoid being in there. Restraint of trade clauses are where you want to restrict what the seller can do once they have sold you their business. They are sometimes necessary to protect the value of the business you are buying.For example, you do not want to pay a lot of money for a business only for the seller to set up a new business next door in competition with you. Or for your seller to poach your staff or customers.
Some typical examples of restraint of trade clauses are :
(a) A clause that says that the seller is not to set up (or be employer by or be a partner or director in) a business in competition with you within a certain number of miles of your business premises.
(b) A restrictive clause preventing the seller from doing business with any of the customers of the business for a period of time, say 2 years, after you’ve bought the business.
(c) A clause which bans the seller from enticing any of your staff to leave your business and go and work for a business in competition with you.
The Business Premises
In most cases the business premises will be leased and this will almost certainly mean that the Landlord has to give formal consent to a transfer of the lease and in this case the Landlord is likely to add all manner of conditions.A common condition is that the seller, as the outgoing tenant must stand as guarantor until the end of the lease. When a lease is being sold as part of the business, the Landlord will require both seller and buyer to sign up to a separate legal document called the "licence to assign". The licence to assign is effectively a separate three way contract which sets out the Landlord's conditions for formal legal consent and sets out the obligations of each party. You, as a buyer, will usually be required to sign up to all the obligations currently on the person selling the business to you.
If you are selling a limited company, the situation is probably a bit more straight forward providing the lease is in the name of the limited company. There should be no need for a licence to assign or the seller to enter into a guarantee agreement. There are exceptions to this though depending on the exact wording of your lease.
Although most business transfers will involve leasehold property, some business premises are freehold. This means that the freehold title must be legally transferred to the buyer as part of the sale. Any mortgages or other debts charged against the leasehold title will have to be paid off. You may be taking out your own mortgage to buy freehold property and your own mortgage provider might have their own conditions that could add extra complexity to the situation.
Business Goodwill
In most business transfers, this will be the most valuable part of the business. Goodwill effectively means the future profitability of the business. It is based on the brand, good name or customer base the seller has built up over time. It is often described as "intangible" because goodwill is not a physical asset. Although the contract deals with a transfer of goodwill it is normal for there to be a separate deed which formally assigns ownership of the goodwill to you the buyer.
Enquiries, Searches and Inspections
It all depends on the particular case, but it is normal for us to make enquiries and carry out searches on behalf of buyer.Searches are reports from third parties such as the local authority, water company and the environment agencies. The local authority search reveals all sorts of information on your business premises and the area they are situated in. It tells your buyer about planning permission, building regulations, conservation areas, the local roads and compulsory purchase to name just a few matters. Sometimes buyers don’t want formal searches done (to save on expense) and to a large extend this will depend on your risk appetite.
Enquiries will involve a mixture of standard commercial property enquiries (CPSEs) and enquiries specific to your business. CPSE enquiries include dozens of sometimes highly technical questions about your business premises. The enquiries specific to the business you are buying will be more focused on specific aspects of the business that you will want to know about before committing to the business purchase. This will all form a part of the due diligence process that we mentioned above.
Depending on the type of business premises involved, you might want to get a professional in to undertake inspections. It is rare that buyers take this step but sometimes it will be advisable. The most common type of inspection would be for a surveyor to have a look at the premises and assess the state of repair and condition. Electricians, gas engineers and asbestos surveyors might also be sent to inspect. All of these searches, enquiries and inspections are likely to lead to further issues that your solicitor needs to deal with.
Employees
You may have heard of the TUPE Regulations. What these regulations say is that where a business is transferred as a going concern, in most cases the contracts of employment will automatically transfer to the new owner of the business from the date the purchase goes through. There is no need for the new owner to enter into new contracts of employment and the new owner automatically inherits all of the rights and (importantly) obligations and liabilities which the seller was subject to.There may be some cases where the TUPE Regulations don't apply and in these situations the contracts of employment will need to be legally transferred in a different way. In cases where you take on employees we will need to obtain a lot of information about the employees. We’ll need to make sure that the business sale contract contains warranties where your seller declares that there are no disputes with their employees and no potential employment tribunal claims; expected resignations or disciplinary issues etc.
Contracts, Book Debts and Liabilities
Even a very small business will have a complex collection of contracts with customers or suppliers. This could be anything from a contract for the hire of a fridge to a commercial contract with clients worth a large amount of money each year. These contracts all have to be identified and disclosed to the buyer of your business. Some contracts can be just cancelled and new ones taken up by you after buying the business. Some may have to be formally transferred, sometimes through a process known as novation. Novations can add complexity as they are three party contracts which will require the agreement of a third party.The sale of business contract will need to deal with book debts (money owed to the business by its customers) and liabilities. Normally the book debts and liabilities remain with your seller, but this will be a matter of negotiation in each case.
Licences and Permits
Some business need licences or official permission to be able to trade. Businesses licensed to sell alcohol, book makers and regulated professions are but a few examples. In each case, there will need to be some process for these licences and permits to be either transferred or the buyer obtain a new licence to coincide with the transfer of everything else.Completion
"Completion" is the legal term meaning when the sale and purchase go through and the business transfers in law from the seller to the buyer. You and your seller will agree when the completion date is. On the day of completion the solicitors will attend to the final legal formalities. They usually do this over the phone with the final completed paperwork being exchanged afterwards. This part of the process will include writing in the dates and authorising a final sign off on all the different legal documents involved. The full range of documents signed off at completion will usually include : sale of business contract; deed of assignment of goodwill; licence to assign; authorised guarantee agreement; any novations; and transfer deeds for legal transfer of freehold or leasehold property.