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Buying a business Which legal documents do you need

Buying a business: Which legal documents do you need?

Buying a business can be exciting and rewarding, but with so many potential pitfalls, how can you avoid document mistakes?

Building a profitable business from scratch takes years of hard work, sacrifice and a fair dose of good luck. So for many aspiring business owners, the idea of buying a business - tapping an existing customer base, a ready-to-go workforce, supplier contracts and intellectual property - makes a lot of sense.

But it’s also a complicated process with many potential pitfalls. From picking the right deal structure, running due diligence to negotiating warranties, there’s a lot at stake and mistakes can be very costly.

In this article, we take a look at legal documents you’ll need and the main issues involved when buying a business in the UK.

1. An Asset or a Share Purchase?

The difference here is fundamental, as it dictates everything that follows.

Here’s a quick summary:

If you’re buying a sole trader or partnership, your only option is to buy the assets, because there are no shares to buy. If it’s a company, you’ve got a choice: either buy the assets from the company itself or the shares from the individual shareholders of the company.

As a buyer, you’ll typically want to buy the assets so you can cherry-pick the ones you want, and (with a few exceptions) leave the liabilities behind. On the flipside, sellers generally prefer to sell their shares so they can get a clean break from the business (including most liabilities), subject to any warranties and indemnities you can get from them.

The decision to buy assets or share is a big one, and will depend on the type of business you’re buying, the circumstances surrounding the deal, any unique contracts or licences the business might have, tax considerations and more. It should be one of first decisions you negotiate and agree with the seller. To change the structure mid-way through the deal will likely cost you a small fortune in extra legals.

But before we get into the details of the asset / share purchase agreement, there are a few preliminary docs that come into play:

2. Preliminary Documents

Confidentiality Agreement

Sellers will typically want to keep the sale confidential from clients and staff (and other third parties). Plus if the deal falls over, the seller won’t want their company details out in the open and you won’t want your buying intentions made public. The confidentiality clauses can go in a separate document, or can be wrapped up in a...

Heads of Agreement

The main terms of your deal are typically laid out in a framework document, called a Heads of Agreement (AKA Heads of Terms). It normally has a clause saying it’s “subject to contract” which means it doesn’t bind either party, apart from any ‘exclusivity period’ that a seller might offer you. Although it’s supposed to be an outline, it will still be quite detailed, covering everything from price, premises, IP, warranties and indemnities, earn-outs, conditions for completion and more.

Due Diligence Questionnaire

Due diligence is the process of investigating the target business to make sure that the information the buyer gives you is accurate and there are no hidden problems. It’s especially important for share purchases because you’ll be taking the company “warts and all”.

By this point, you’ll want your advisors (accountant, lawyer etc.) on board to tell you what to ask for (via a ‘due diligence questionnaire’) and then pore over the answers that come back - there may be a tonne of paperwork to get through! Your lawyer will then use the responses when drafting your asset / share purchase agreement and create specific clauses to deal with any risks or problems unearthed during due diligence.

Now it’s time for the main transaction document - the asset / share purchase agreement. Remember if you’re buying a sole trader or partnership, or if you’ve structured the deal to buy only the assets of a company, then you’ll use an asset purchase agreement.

3. Asset Purchase Agreement

As the buyer, your lawyer will generally prepare the first cut. It should describe exactly which assets are being bought, such as machinery, stock, customer/supplier contracts, premises and intellectual property. You’ll also list out the assets that are not being purchased.

standard asset purchase agreement will also generally cover:

Stock – list out and value all current stock, then do a stock take on or after completion to make final adjustments to the purchase price.

Plant and Machinery - list out all plant and machinery - hopefully the seller will have a full asset register, plus copies of hire purchase or lease agreements.

Goodwill - this is the premium over the book value of the business, which typically represents things like the value of the brand, customer base and IP.

Creditors/debtors - the seller will generally remain on the hook for creditors until the completion date, and retain debtor payments.

Employees - if you’re buying the business as a ‘going concern’ then the employees will usually be transferred automatically under the TUPE legislation. Both parties should get detailed advice on this because the financial consequences can be significant.

Contracts - all contracts and agreements should have been identified and reviewed during due diligence. You’ll list out those documents and add any specific clauses to protect yourself against potential liabilities found in those contracts.

Warranties – these are a series of contractual statements made by the seller about the business as at the time of completion. They are particularly important (and long!) in share purchases, which we’ll cover below.

Assignment deeds – if you want to take over hire purchase or leasing contracts, you might need both formal consents and signatures from the hire purchase/leasing company before they can be moved across (i.e. ‘assigned’) to you.

These will be dealt with in separate documents called ‘assignment deeds’. Intellectual property rights such as trademarks or patents will similarly need formal assignment or transfer documents so you can take legal ownership of these rights.

Where business premises are involved in the purchase, you’ll also need:

Transfer document - this is a formal transfer document that will be needed, like in any other conveyance.

Landlord consents - if the business premises are being leased, you’ll need the landlord’s consent (at your expense) to get the lease transferred or assigned to you. This really increases the complexity of the transaction and can soak up a lot of time or even completely derail the deal.

Personal Guarantees - the landlord may require you (and your directors if relevant) to give personal guarantees or other security as condition to getting their consent.

Licence for early possession - the seller might give you a temporary licence to occupy the premises, on the understanding that you’ll both do your best to get the landlord’s consent as soon as possible after completion.

Now let’s look a purchase of company shares.

4. Share Purchase Agreement

If the deal is structured as a purchase of company shares, the main document you’ll negotiate is a share purchase agreement. Because you’re buying the underlying company shares, you’re in effect taking on all the assets and liabilities of the company.

As the buyer, you’ll again be expected come up with the first draft. The main things you’ll need to cover include:

Warranties

These are a long series of clauses that act like statements made by the seller as at the time of completion. For example, that the seller legally owns and possesses the company assets or that company isn’t about to be sued etc. They’re supposed to be comprehensive, so expect them to run over many pages. A lot of warranties are boilerplate (like the above examples), but where they really add value is when they deal directly with issues discovered during the due diligence process.

The trick will be to balance your need to have a comprehensive set of warranties in place, while being reasonable in terms of both the number and scope of the warranties. These will be heavily negotiated and you’ll rely heavily on having a good lawyer on board for these.

Limitation of liability

The seller will usually also want to include some clauses that limit their liability in terms of both the amount of liability (i.e. a capped amount) and for how long they remain on the hook for any breach of a warranty.

Indemnities

If your due diligence reveals any potentially serious problems, you’ll want to include an indemnity to deal with each issue. An indemnity is a specific type of clause that offers more powerful recourse than a warranty. Again, you’ll want sharp negotiation skills for these.

Restrictive covenants

In certain cases, you might want to prevent the seller from competing with you for a set period using a non-compete clause, which is a type of ‘restrictive covenant’ in legal speak.

There also a few other documents you’ll need for a share purchase:

Disclosure Letter

In response to the warranties you’re seeking, the seller (and their lawyers) will carry out a ‘disclosure’ exercise. The end result will be a disclosure letter, which records any exceptions or qualifications to the warranties, instead of changing the actual text of the warranties in the share purchase agreement.

Tax Indemnity

To protect yourself against any surprise tax liabilities, you’ll also seek a separate tax indemnity from the buyer. This will allow you to be reimbursed if you later find out that there is unpaid or undisclosed tax owing for a period when the seller owned the company.

6. Completion Documents

Completion Agenda

For asset purchases, you’ll need to tick off a lot of practical things, such as VAT registration, payroll, PAYE, national insurance, building and contents insurance etc. – a completion agenda will help you keep track.

Board Minutes

If you’re buying company shares, you’ll need to write up board minutes for the share transfer and any other formalities.

Final word

By now you’ll agree that buying a business involves a lot of paperwork! A few preliminary docs will be the same whether you’re buying assets or company shares. But from then on, the suite of documents required will differ depending on the deal structure.

There’s a lot at stake and a lot to get through. But with the right advisors on board, you’ll have the confidence that you’re buying a business without any nasty surprises.

To find out how much a solicitor will charge, you can get multiple, fixed fee quotes from a panel of solicitors, handpicked by our friends at Lexoo. Simply head on over to Lexoo and submit your requirements - the service is free, so give them a try!



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