How do I buy a business?

November 30, 2017

You might be adding a new business to your portfolio or taking over the business to develop it further. Buying a business will be a major business event. You will need to be certain that the business you are buying is exactly as described, without any surprises.

Our solicitors will advise you on obtaining information and ensuring that the seller make appropriate written promises about their business. 

how do I buy a business

Should I buy the assets or the shares? 

You have two options as a buyer. You might want to ‘cherry pick’ the assets of the business that you want. If the target business is a company, you could alternatively buy the shares from its shareholders. Sellers would generally prefer a share sale as you’ll be taking over on the entire business, and the sellers get a cleaner break.

Our solicitors will look at:

  • the type of business;
  • tax issues with your accountant or tax adviser; and
  • unique assets that the target business has (including customer contacts, intellectual property rights or contracts).

Deciding on whether you would want to buy the assets or the shares will be one of the first decisions you should negotiate and agree with the seller.

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What documents will be needed?

Whether you buy the assets or the shares, there are a number of preliminary documents that you will need to deal with.

Confidentiality agreement: The seller will usually want to keep the sale confidential from employees, customers and others at least in the initial stages. You will also want to make sure that there is a smooth transfer. 

Heads of terms: The main terms of the deal are usually laid out in a non-legally binding document, called a Heads of Terms. You may want to ask for a legally binding exclusivity period during which the seller undertakes not to sell the business to anyone else.

Due diligence questionnaire: Due diligence is the process of investigating the business to check the details about the business and to make sure that there are no hidden issues. The process is particularly important if the shares are being bought, since you will, in the first instance, be taking on all the liabilities of the company. The sellers’ responses may lead to renegotiation. Our solicitors will use the sellers’ responses to the due diligence questionnaire in preparing the asset or share purchase agreement to address any issues which have been discovered.

Asset purchase agreement

The buyer’s solicitors will normally prepare the asset purchase agreement. The agreement provides for which assets are being bought (eg stock, fixtures and fittings, equipment, customer and supplier contracts, business premises and intellectual property). It will also list out any assets and liabilities which are not part of the transaction.

The asset purchase agreement will also contain protections such as:

  • warranties and indemnities; and
  • restrictive covenants in relation to the seller carrying on any competing business.

You will also need in relation to any business premises, landlord consents, licenses or personal guarantees.

Share purchase agreement

If you are buying the shares, the principal document is the share purchase agreement. It will be important that we draft the share purchase agreement so that it contains the relevant protections to cover unforeseen liabilities.

The warranties and indemnities, and the restrictive covenants are likely to be heavily negotiated, so having experienced commercial solicitors will be key in ensuring that you have the right protections in a timely and cost effective manner.

Are you thinking about buying a business? 

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