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The Pitfalls of Buying a Business and the Importance of Having Legal Advice

February 2020

Buying a business poses less risk than starting a business from scratch but having sound commercial and legal advice is crucial to ensure the deal is watertight. Once you have found the right business for you, there are many points to consider and research to ensure you know everything before parting with your hard-earned cash.

Businesses can be acquired in two ways; buying the assets of the business or acquiring the shares in the selling company which runs the business. The most appropriate deal structure will depend on the circumstances of the Seller and the transaction.  The parties’ choice can be influenced by a variety of legal, commercial and tax considerations.

Asset Purchases

Asset purchases typically include buying the goodwill, equipment, property and stock of the business, but what if the seller is a limited company and wants to dissolve after you complete the deal.  The asset purchase agreement will contain numerous warranties and indemnities from the seller about what has gone on before completion and, potentially, obligations after completion.  If the seller company is dissolved this could leave you with no-one to pursue if a warranty is breached and an indemnity worthless. 

You will be taking over the seller’s existing contracts but what if the contracts cannot be assigned or novated (i.e. transferred to you) and the change of control triggers termination provisions.  This will result in loss of revenue for you.

The transfer of any employees is always an important issue.  It is a common misapprehension that buying assets means that you avoid taking on liability for any employees of the business. This may well not be the case as employees of the seller may be subject to Transfer of Undertakings (Protection of Employment) Regulations 2006 which has the effect of transferring employees’ rights and obligations to a buyer where “the whole or substantially the whole” business is sold.

There will be tax consequences to any business transaction both for your own business (if you already have one) and the new one so it is important to obtain specialist tax advice.  One tax disadvantage for a buyer of assets is where an expensive property interest is transferred and stamp duty land tax or land transaction tax is payable.

What if the seller is only selling due to their own precarious financial situation?  Buying assets requires very careful due diligence, particularly if the seller is possibly insolvent as on liquidation or bankruptcy the assets can be clawed back. It is also imperative to check that any assets being bought are unencumbered and not subject to specific charges over or other claims.

Share Purchases

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 ownership of the business. This means stepping into the shoes of the seller in taking ownership of the all the assets but also the ongoing liabilities.

The main disadvantage to a share purchase is that all of the liabilities of the company (hidden or otherwise) remain with the company and will become the responsibility of the buyer on completion.  To protect a buyer, the agreement contains extensive warranties and indemnities from the seller which the buyer can enforce and recover any losses. However, even if the seller provides these, if the seller becomes insolvent then the buyer will have little recourse against the seller and may not be able to recover their losses.

Buying a business is a complex process which can have costly consequences if not carried out correctly. Having specialist legal advisors to carry out the necessary due diligence and draft an agreement which adequately protects your interests is imperative. 

If you have decided to purchase a business and would like a fee estimate from one of our specialist commercial solicitors, then please contact us on 02920 404027 or email below. To find out more about our services please visit our website at www.howellslegal.com.

Rhidian Hobbs 

Partner | Commercial Property 

E: Rhidian.Hobbs@howellslegal.com

 

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