We have a specialist, highly experienced team of commercial lawyers to advise on buying or selling businesses and are known for a practical, commercial yet thorough approach which is cost proportionate and effective. We handle transactions ranging from sales of £100,000.00 or less up to multi-million pound deals.
Whilst a number of the issues remain the same regardless of the sale price, we fully understand that with small businesses, legal and other costs must be proportionate.
In many cases, we are instructed from the outset, including the negotiations, due diligence and heads of terms and we advise clients who are buying on how to find out at the earliest stage whether there are issues which they should consider as deal breakers. Our lawyers general approach however is always to facilitate a deal happening rather than finding reasons to advise clients not to proceed.
Selling or buying a business requires careful planning and good advice well in advance to make it as painless as possible. It is extremely important to keep the business running whilst the negotiations take place. Speak to our solicitors for further advice
A difficult area and one of the areas in the contract where disputes, delays and costs can, if a commercial and practical approach is not adopted by both parties and their lawyers, mushroom. Warranties are factual assertions about the business, it’s performance, assets, liabilities and litigation, given by the sellers to the purchasers in order to give the purchaser comfort that matters relating to the business are as stated, and buyers generally like such comfort as personal responsibility and liability usually attaches to the sellers as individuals on an ongoing basis, generally for a fixed period post completion of the transaction.
For the same reason, business sellers and their solicitors generally seek to avoid giving such warranties and will argue that warranties are unnecessary if the buyers and their solcitors have undertaken due diligence. Matters can also be complicated if the buyer requires bank finance for the purchase as the buyer’s lenders may have their own advisors and the bank or it’s advisors can be quite inflexible as to requirements.
Warranties can be extensive and wide ranging and can run to 50 or 60 pages! This is a prime example of where experienced, practical, specialist business purchase or sale solicitors add real value. A transaction worth £50,000.00 needs to be treated differently, and proportionately to a transaction worth £50,000,000.00. If warranties are breached, the purchaser can sue for the damage he suffers as a result of the breach.
Restrictive covenants or seller staying on
Typically with a small business, that business will have revolved largely around the owners, who have been fundamental to it’s success. Buyers may well need some assistance from the seller for a period post sale to get to grips with the business and to transition staff and external relationships.
It is therefore common for sellers to be required to stay on post completion. The flip side of the situation where the seller has been instrumental in the business success is that the buyer may require the selling parties to covenant not to compete with the business for a set period post-sale. This may also include restrictions on poaching customers or staff. Care is always needed with drafting covenants since if they are too wide they may be found by a court to be unenforceable, in whole or in part.
Timing of payments, possible earn out or deferred payment
A lot of time, cost and friction is spent on warranties, especially where the full purchase price is paid on completion. Whilst a seller will naturally want to resist any form of deferred payment, a compromise may be available in the form of an earn-out, whereby the seller receives some of the business sale funds at post completion, based on set criteria which may be performance based part of the purchase price is deferred for a period of time to ensure that certain unclear issues have not proved problematic.
The purchaser may be concerned, if all the consideration is paid at completion, that he will later find the vendor is hard to trace, leaving the purchaser to deal with anything that he sought to protect himself against in the warranties, himself.
Therefore, a useful mechanism can be deferred consideration, whereby a certain amount is paid upfront and the rest over a period of time (usually the warranty period). Other mechanisms that can be used would be to have part of the consideration paid into an escrow account managed by both parties or their lawyers as security for the warranties.
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In our experience, negotiating a company sale will take at least a month, and in most cases 2 to 6 months. There are likely to be at least one or two weeks where key personnel in the seller business will need to be available either by telephone or attending meetings in order to ensure that matters are dealt with and that negotiations run effectively. It is therefore important that you plan your resources carefully to ensure that the continuity of the business is not affected.
Pros and cons of buying/selling business assets
An asset purchase involves the buyer only acquiring the assets (and certain agreed liabilities) that make up the business. The assets of the business may include tangible assets, such as land, machinery and stock, as well as intangible assets, such as intellectual property and goodwill. After the acquisition, the buyer will own the business and will continue to operate it using the assets acquired. The assets will be specifically identified in the sale and purchase agreement.
Free of liabilities – with an asset purchase, you pick and choose the assets you want to take (subject to negotiations with the seller). Because of its nature, in an asset purchase you also choose which liabilities, if any, you take on. The obvious advantage of this is that you can leave certain liabilities which may be onerous.
Apportionment of purchase price – Another advantage of an asset purchase is that you are able to apportion the purchase price between various classes of assets. This has various tax advantages, especially that the costs of assets can be reset to their market value at the time of purchase which will normally reduce the capital gains tax payable at a later date. Furthermore, as the sale involves a transfer of a business as a going concern, VAT is not chargeable.
Warranties and indemnities – If the seller is a company, the warranties and indemnities offered in the sale and purchase agreement would on the face of it be from the company, which in turns means they are potentially less valuable. One way of dealing with this is negotiating with the selling shareholders that they also personally give warranties and indemnities in the sale and purchase agreement. Additionally, key contracts of the business with third parties may require the third party’s consent before they are able to be assigned. It may be that some contracts cannot be assigned at all. This could reduce the value of the business for the purchaser.
TUPE – A common misapprehension is that buying assets means that the buyer will be able to avoid taking on liability for employees of the business. This may well not be the case as employees of the seller business will be subject to TUPE legislation (this is employment legislation) which has the effect of transferring employees’ rights and obligations to a buyer where “the whole or substantially the whole” business is sold. It is therefore a question of fact whether the sale is of the business in practical terms rather than just individual assets. If the seller or buyer attempt to dismiss employees because of the transfer (or because of a reason connected to the transfer), and they do not have a valid reason (under TUPE) for that dismissal, the employee may be able to pursue an unfair dismissal claim against the new employer as well as the sellers.
Tax – Tax disadvantages for a buyer of assets can include where a lease or property interest is transferred and stamp duty may well be payable. From the seller’s point of view, an asset sale is subject to two-tier taxation for the seller. The selling company will suffer corporation tax on the sale of the assets. There will then be a further charge when the proceeds of the sale are distributed to the shareholders. Because of this, the seller may charge a higher purchase price to take this point into consideration. Additionally, for any transfers of land, stamp duty will be payable.
Contracts – Although the sale and purchase agreement could list warranties and indemnities from the seller, ultimately liability for third party contracts will still remain with the seller. This could be problematic for the buyer if the seller does not perform certain obligations.
Due diligence – It is also important to note that, buying assets requires very careful due diligence, if the seller sells assets whilst possibly insolvent, it is possible that on liquidation the assets could be clawed back. It is also imperative to check that any assets being bought are unencumbered and not subject to specific charges over them or other claims.
A share purchase is where the buyer acquires the shares of the company that owns and operates the business. In such a transaction the ownership of the company is transferred to the buyer, but there is no other change in the business. This means taking over all assets and and ongoing liabilities.
Advantages of a Share Purchase
Simplicity – One of the main advantages of a share sale is that the transaction is simpler than an asset sale. Additionally, there is a lack of disruption to trade continuity, as from an outsiders point of view, very little will appear to have changed. There is also no change of employer, so employee contracts are not affected.
Contracts unaffected – Another advantage of a share purchase is that outstanding contracts remain unaffected legally by the change in ownership of the company. Additionally stamp duty payable on shares is only 0.5%, compared to a much higher percentage for land under an asset purchase.
Disadvantages of a Share Purchase
Liabilities come with it – One of the main disadvantages is that all the liabilities of the company (hidden or otherwise) remain with the company and indirectly become the responsibility of the buyer. Extensive investigations and wide-ranging warranties and indemnities are insufficient to protect the buyer in full. The buyer is therefore exposed to a certain degree of risk when purchasing the target company.
Because of the level of liabilities the buyer may be exposed to, they will need to secure extensive warranties and indemnities from the seller, which can prove to be quite difficult. Even if they obtain these, if the seller is bankrupt/insolvent and the buyer needs to rely on one of these, they still will not be able to recover their money.
For legal advice on buying or selling a business, company or business assets, contact our specialist business sale lawyers in London.