Buying/Selling a Business FAQs

Overview for first timers

The process of buying or selling a business can be very complex and can take a long time.

• The process can be broken down into the following stages:

  Marketing the business - this is usually done by an agent. We have links with a number of specialist agents and can introduce you to an appropriate agent for your business.

  Heads of Terms - These are the basic terms on which a buyer is prepared to purchase a business. The best time to get solicitors involved in the sale or purchase of a business is at the time of agreeing heads of terms. These form the basis of the main sale contract it is important that the parties do not agree a position within the heads of terms that they may later want to retreat from. Solicitors will also be able to give suggestions on risk control, such as introducing an ‘earn out’ period when acting for a buyer of a relatively unproven business.  

  Heads of Terms are generally not legally binding except for provisions dealing with confidentiality etc and any agreed exclusivity period during which the seller agrees not to negotiate with other parties.

  Due Diligence - This is the process by which a buyer will endeavour to find out everything he needs to know abut a business before making the decision to go ahead with the purchase. It usually takes the form of a long questionnaire (or a number of questionnaires if there is property involved) which must be responded to in a particular form. It is important that all responses are compiled with the input of your solicitor to prevent a seller making commitments which are outside and not reflected in the final agreement.  Particular care needs to be taken with the handling of confidential information and personal data.

  Contract - This is the end product and the  most important part of the process. A contract will state exactly what is being paid and when and for what, it will also contain statements in the form of warranties about the business which if later proven to be untrue would entitle a buyer to reclaim some of the purchase price (or fail to pay it where there has been an earn out or deferred consideration).  However there is normally a disclosure letter under which the letter “discloses” matters to the buyer which would otherwise amount to a breach of the Warranties.  The disclosure letter is a critical document as the warranties are not normally affected by facts or circumstances not fairly reflected in it even if the buyer was aware of them.

  At Ellis Jones we deal with a variety of transactions often involving millions of pounds.  We endeavour to  ensure that the above processes are carried out in a manner that is proportionate to the size and complexity of each particular deal.

Asset Sale/ Purchase

A crucial difference in the effect between an asset sale and a share sale is the tax treatment. Generally a seller will be considerably better off with a share sale, the tax issues need to be addressed at the preliminary stage.

• What is the legal difference between a share sale and an asset sale?

  The main characteristics of each are set out below:

  Share Sales the buyer buys the company including:

  • all outstanding  liabilities of the company past, present and future whether or not known to the buyer;
  • all of the employees of the company;
  • the buyer is responsible for stamp duty of ½ percent on the price paid for the shares.

  Asset Sales:

  • the buyer takes on only those assets and (apart from TUPE) only those liabilities identified in the sale contract;
  • the purchase price for the business is received by the target company;
  • all of the contracts of the target company will need to be assigned to the buyer;
  • employees transfer to the buyer under TUPE.

  The buyer is responsible for stamp duty land tax if any interest in land or buildings is involved.

• What are the main considerations with an asset sale/purchase?

  The main considerations are:

  • Ensuring that the due diligence exercise identifies all of the assets and any liabilities that are used or incurred in the business to ensure these transfer to the buyer;
  • Understanding the application of TUPE to the employees;
  • Dealing with existing contracts with suppliers (including IT suppliers and other owners of intellectual property), customers, landlords and (if applicable) financiers. Most of these contracts especially leases and IT and finance contracts will not be transferable without the consent of the other party. A purported transfer in breach of their terms can give the other party the right to terminate the contract and repossess leasehold premises or equipment on HP etc.
  • ensuring that the transfer is exempt from VAT.

• How long would a company or an asset sale/purchase take?

  Typically a transaction will take 6-8 weeks. However simple transactions can be completed much faster and more complex transaction may take significantly longer

Management Buy Out

• What are the special considerations that need to be taken into account on a management buy out?

  There is a clear conflict of interest between the managers participating in the buy out and other shareholders. Rules having regard to directors duties, have to be put in place to handle this conflict.

  In a management buy out the purchasers of a business already have a significant amount of knowledge about the business and this will affect the parties bargaining position in relation the some of the contractual terms; for example; it is likely that the contract will contain fewer shareholder warranties since the buyers will either be the managers or person who will rely on them for knowledge of the business.

• Would you expect a management buy out to be completed faster than a usual sale?

  Not necessarily, although there may be scope for reducing the due diligence process. It is still important that the contract is fully negotiated at arms length.

Sale/Purchase of a business in administration

• How is the purchase of a business in administration, receivership or liquidation different from a normal purchase?

  • The sale is usually time critical (many need to be completed within a matter of days)
  • There will be much less scope for a buyer to conduct a thorough due diligence exercise
  • The contract will contain no warranties and the situation will be very much “buyer beware”
  • “pre pack” administrations are common.  This is where the purchase is agreed in advance of the administration.  In these situations the sale usually follows immediately on the company being placed in administration.