Buying A Business

If you are thinking of buying a business you first need to establish whether you wish to buy the whole business or a specific part of it (for example, a business name and a customer list or just certain fixtures and assets).

You should engage your accountants, tax advisors as well as one of our specialist business law solicitors as early as possible to discuss and plan your proposed purchase from a financial, legal and tax perspective. It may be that certain steps need to be taken in order to resolve issues that may be of concern to you or to create tax efficiency for both the seller and you. Your accountants or other appropriate advisors will be able to advise on the best way to structure the deal (including consideration and potential for deferred payment).

The most important thing is that you seek advice from appropriate advisors at an early stage so that they can advise on, and assist you throughout, each stage of the process.

When going through a merger or acquisition, the seller has no legal duty to disclose to the buyer any issues, defects or liabilities affecting the business. The buyer needs to conduct its own investigations, which is known as the due diligence exercise.

Due diligence can take the form of commercial, legal, accounting, financial and tax investigations (amongst other things) and may involve various different advisors such as solicitors, accountants, tax advisors and specialist advisors (for example, health and safety or environmental consultants).

The extent of due diligence will depend on the specifics of the transaction, what is being sold, the size and nature of the business and the buyer’s appetite for risk.

The aim of due diligence is to uncover any problem areas in relation to the business enabling a buyer to:

• make an informed decision as to whether it wishes to proceed to purchase the business;
• assess whether the purchase price offered is fair or whether there will be any issues or liabilities post completion that should result in a reduction to the purchase price;
• have a rounded view and understanding of the business and assets that it is acquiring and any liabilities that are being assumed;
• to know whether any post-completion actions need to be taken;
• to negotiate further protections from the seller in the sale and purchase agreement with regard to known liabilities or concerns; and
• determine whether any additional contracts or documents are required in relation to the transaction.

It is important to take advice from your accountant and/or tax advisor, as well as one of our specialist business law solicitors, when you are considering selling your business as they will be able to advise on the best structure for the sale. An asset sale and a share sale have different effects for a seller from both a legal and tax perspective.

In a share sale the buyer will acquire the shares in the company from which your business is traded. This means that the company retains ownership of its business, assets and liabilities and continues to operate and trade in its usual way without interruption. The only thing that changes is who owns the shares in the company.

From a legal perspective, sellers generally prefer share sales where they are selling all of the business, as all liabilities of the business remain with the company, meaning you would achieve a clean break and would not have to go through winding up the company. In an asset sale a buyer acquires the business (the goodwill) and associated assets to the business that the seller and the buyer agree are to be sold.

In an asset sale the buyer will ‘cherry pick’ which assets it wishes to acquire and will only agree that limited liabilities (if any at all) will pass to it. Generally, most liabilities arising before completion of the transaction remain with the seller.

To this end, from a legal and tax perspective, buyers usually prefer asset purchases. Asset sales are appropriate for sellers who wish to sell only a part of their business or certain assets but wish to retain the rest. Whether a transaction proceeds as a share sale or an asset sale will ultimately be a commercial decision for the parties to the transaction but may depend on the following:

• the tax consequences for the sellers and the buyer;
• the bargaining power of the parties – who wants the sale or purchase more;
• what is the economic climate at the time of the sale and purchase;
• what are the terms that are being offered;
• whether there would be any difficulties in transferring the business or any of the assets such as obtaining consent from regulatory bodies, third parties in respect of key contracts, landlords in relation to any properties out of which the businesses are traded; and
• the existence of any extensive liabilities of a company.

If you are considering selling your business, it is important to plan ahead and take advice from the right professionals so that you understand the legal and tax implications of the sale structures which will enable you to find a structure best suited to you.

What happens to employees will depend on whether you are buying assets or shares. For a brief explanation of the difference between an asset sale and a share sale, see our FAQ ‘Should I buy the shares in a company or just the business and its assets?’.

In a share purchase only the ownership of the shares in the seller’s company will change and there will be no change of employer for the employees. The employees will remain employed by the company on the same terms and conditions after you have purchased the shares as they were before your purchase. Any changes affecting or regarding the employees following completion will need to be effected by the company (under its new ownership and management by you) in accordance with applicable employment law.

Generally speaking, if the seller transfers its business (or part of its business) through an asset sale and there are employees who work in that business, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will apply. TUPE gives the affected employees the automatic right to transfer their employment to you (as buyer) on completion and continue to be employed by you in the business following your purchase. TUPE provides that the employment of those employees will transfer to you on the same terms and conditions with no change to their length of service or benefits. TUPE lays down procedural steps that must be followed by both the seller and buyer in relation to the transfer of a business. TUPE also applies to those persons who work in the business under ‘worker’ status.

It is extremely important that you take legal advice if you are purchasing a business and the business has employees or ‘workers’, particularly where the transaction is structured as an asset purchase (rather than a share purchase) and TUPE will apply. It is the responsibility of both the outgoing and incoming employer to ensure the TUPE provisions are complied with. Severe penalties can be imposed by employment tribunals on both the outgoing and incoming employer for non-compliance and/or employee dismissals by reason of, or reasons associated with, a business transfer.

For advice on TUPE and other business-related employment issues, our team of dedicated employment solicitors is able to help.