1. What are you buying?
There are two main ways in which a purchase can be structured:
- a purchase of business and assets; or
- a purchase of shares.
How the deal is structured affects not only what you are buying but what liabilities you will be taking on as the new owner.
When buying the business and assets, the parties can cherry pick what is being sold. So, you will need to think about whether the deal includes everything that you will need to run the business yourself – are you getting all the equipment and machinery or are you just getting a customer list? Having conversations with the sellers at the outset, to ensure that you are getting everything that you think you are buying, will be an important step.
In contrast, if you buy the shares in a limited company, you get the whole of the business. The advantage of this is that you know you are getting everything that the business currently owns. However, you also inherit any liabilities that the company may have such as any debts and ongoing contracts. It is therefore important to make thorough enquiries before buying the shares so that you know what you are letting yourself in for.
2. Who do you need to instruct?
Obtaining legal advice on any proposed purchase is obviously important. But there are also other areas that you may need to seek advice on. For example, will you need specialist accountancy and tax advice? Accounting and Tax specialists will be able to talk you through the different tax implications of how a deal is being structured and help you to assess whether the business’ finances are in good order.
Will you need external funding to finance the purchase? If so, do you need to speak with your bank about taking out a mortgage or loan to fund the purchase? Making sure that you have the funding arrangements in place early on may help you avoid delays later in the purchase process.
3. What about the premises?
Whether or not you are intending on running the business from its existing premises, you will need to think about who owns those premises. Is it owned by the company or sellers, or is it leased?
If the property is being leased, you will need to obtain consent of the landlord if the lease needs to be transferred over to you, and you may have to cover the landlord’s costs in granting their consent.
It will also be important to consider the terms of the lease, such as how long it has left to run; what your obligations will be as tenant; and whether there are any restrictions on what you can and can’t do with the property.
Is the property even suitable for your needs? If not, then you may need to negotiate a surrender of an existing lease and you will need to consider what options are available in terms of alternative premises.
4. What are the payment arrangements?
If you are in the fortunate position of being able to pay the full purchase price on completion, you might not have to worry about any ongoing relationship with the sellers.
However, you may not have the funds to be able to pay the full price up front; or you may have arranged for a staged sale process in which the seller will remain involved for a while to allow you to learn the ropes from them. Either way, if you are going to be paying the purchase price in instalments over a period, you should think about what additional security the seller might want to ensure that they receive their payment. Will anyone need to provide a personal guarantee? Are they going to want a charge over the company’s assets? What other rights will the seller have if you default on payment?
5. What other contracts will you need?
If you are purchasing shares alongside other individuals, you may want to put a Shareholders’ Agreement in place which sets out any requirements in relation to key decision making, along with any additional rights of the shareholders surrounding the transfer of shares and how and when they can be sold. Even if you are going into business with someone you know and trust, it doesn’t hurt to have these arrangements set out in writing to give everyone peace of mind as to how the business is going to be run and what their rights will be as a shareholder if things don’t go to plan in the future.
Depending on who is involved in the business, you may need to consider people’s employment arrangements. Will you need a director’s service agreement setting out what your role in the business is and what the terms of your employment are? Is there anyone else who provides services to the business who needs a new employment contract or consultancy agreement to formalise their arrangement?
What terms is the business trading on? If the business doesn’t have formal terms and conditions in place, you may want to consider whether these are needed; or whether any existing terms might need updating. Having written terms and conditions will provide certainty as to the performance obligations of the business and its customers and any liabilities that you might have. This can be valuable in terms of saving time and money should a dispute ever arise.
If you need any advice on buying a business or on any of the issues discussed in this article, please feel free to get in touch with us.