The prospect of owning your own business can be challenging but rewarding. One way to achieve business ownership is to buy an existing and established business. When purchasing a trading business, either as a share purchase or asset purchase, it is imperative that legal risks are known and mitigated.
So what do you need to consider?
Both buyer and seller usually aim to negotiate a period of exclusivity within their heads of terms so that both parties show commitment to the transaction. An exclusivity agreement can ensure that neither party can negotiate with others during the exclusivity period, confidentiality is maintained and the parties have a known time frame to try and get the deal through.
These exclusivity provisions can be set out in a separate agreement or within the Heads of Agreement/Heads of Terms document which sets out the key elements of the buying process (such as the price, asset list, timescales etc.
Another important step in the process is completing due diligence. Due diligence is the process where professional advisers are able to raise queries on the business from a legal, accounting and commercial perspective. Due diligence can include an investigation into:
– ownership of what’s being sold, including any intellectual property rights
– any third party rights over any of the assets (eg bank securities or leasing company rights)
– existing business trading documents, such as terms and conditions
– existing customer contracts (to ensure, for example, that you will obtain the benefit of these)
– employment contracts and previous claims/issues (if there are employees)
– the overall financial and legal “health” of the business and anything that might affect it
– tax and general legal consequences of the purchase
– additional documents if you are buying a limited company (such as the Articles of Association and Shareholders Agreement).
This enables a buyer to understand exactly what they are buying. Revealing any issues at this early stage will help you to negotiate any appropriate reduction in price or even pull out of the deal if it is a bad bargain.
You can also minimise your risk by negotiating:
– Restrictive covenants to stop the seller immediately opening up in competition
– Warranty and Indemnity protection from the seller regarding the state of the business
– A staged payment process depending on future performance of the business
As part of our service, we help to negotiate the legal issues at the earliest opportunity. If you are thinking about buying a business please contact our experienced commercial department. We will guide you through the process from negotiations right through to completing a purchase.