12 steps in the legal process of buying a business

 

 

Four Oaks Legal Services has a business and commercial department, which provides a full range of company related legal advice. Here Stuart McIntosh, commercial Solicitor and Director at the firm, takes a look at the step-by-step process of buying a business.

If you want to own a business, but don’t like the idea of starting from scratch, then buying an existing company could be worth considering.

It may involve more upfront costs but buying an existing business could present less risk as you have a better idea of actual profit and loss, plus you can often acquire valuable intellectual property, such as patents, trademarks, and copyrights.

Once you have secured the right business, based on location, size and industry, it’s a good idea to contact your Solicitor. Here at Four Oaks Legal Services we pride ourselves on our professional and friendly approach, which involves transparency every step of the way. We partner with entrepreneurs that are looking to buy a business and enable them to steer their new company in a fresh and exciting direction.

While every business sale is unique there are often similarities with most ownership transfers. Here are some of the steps we go through when someone wants to purchase an existing business:

1, Due Diligence: This is commonly the first step in the business buying process and put simply it is when you first check out the state of the business you want to buy. It is important to assess whether the business is sound and at first glance worth the money you are prepared to pay.  You will want to check the condition of the physical assets and value of the goodwill, and at this point, line up your Solicitor and accountant.

2, Heads of Terms: This is also known as a memorandum of sale and consists of an outline of what is being sold. This agreement will include such things as an asset list, any exclusions, proposed completion date, details of the lease and importantly the sale price. While this document is not legally set in stone, it is considered morally binding so a major change at this stage will usually be frowned upon.

3, Instructing Your Solicitor: Following on from drawing up of the heads of terms this is when the Solicitors are formally instructed to start the legal process. At Four Oaks Legal Service we highly recommend you contact us as early on in the process as possible so a solid and accurate legal basis can be drawn up right from the start. The memorandum of sale is important as it is used as a guide to assist in writing up the contract.

4, The Contract: The business seller’s Solicitor usually draws up the first draft of the contract and very often it will be in favour of the seller. This then starts a process of each Solicitor amending the document to suit their own party until eventually an agreement comes out that is acceptable to all. At Four Oaks we always ensure we are right by your side, particularly at the contract negotiation phase. It is vital that you can fully trust your legal advice, which should give you complete peace of mind at this critical stage.

5, Restraint of Trade Clauses: This is a particularly interesting step in the process, which is usually carried out in favour of the buyer. Essentially, we include these clauses to prevent the seller having an unfair advantage over the buyer once the sale has happened. A perfect example is preventing the seller from setting up an identical business next door to the one you have just bought from them.

6, The Business Premises: In a business sale that involves lots of land and buildings this is an important topic. Often the premises will be leased, so inevitably this brings in a third party – the landlord.  The land or building owner will want to ensure they won’t be worse off from having a new business owner, so usually a separate document will be drawn up detailing the obligations of all parties. This document is known as the “licence to assign”.

7, Business Goodwill: The goodwill of a business is often the most valuable part of the sale and principally refers to the future profitability of the business. Such factors as brand, a good name and the value of the customer relationship play a big part here. Goodwill can be described as an “intangible asset” because it isn’t definite like a physical asset.

8, Enquiries, Searches and Inspections: This is similar to the process that takes place during a domestic house sale. Enquiries and searches are carried out on behalf of the buyer and commonly use the services of a third party, such as a local authority, energy provider or environmental agency. The process will result in reports being drawn up which will further inform the buyer and may affect the sale price agreed.

9, Employees: Transfer of Undertakings (Protection of Employment) (TUPE) law state that when a business is transferred as a going concern, usually employees’ contracts also pass over to the new owner. Under these conditions the contracts do not change, and the new owner automatically inherits the rights and obligations from the seller. At Four Oaks we will advise if the TUPE laws apply to your particular case.

10, Contracts, Book Debts and Liabilities: Every business sale will involve a collection of existing contracts with both customers and suppliers. There will also likely be a certain level of existing debts that the business is owed by its customers. The ownership and management of these contracts and debts will need to be agreed between the buyer and seller, and this is where the joint expertise of the Solicitors will be in high demand.

11, Licences and Permits: Some business sectors need licences or other such permissions to be able to trade, for example pubs and book makers. In business sales, these licences can be transferred to the new owner or the buyer will need to apply from the necessary authority for their own.

12, Completion: Finally, we come to the happy day of completion. This is the legal term given to the point where the sale and purchase go through and the business transfers in law from the seller to the buyer. Both Solicitors will have already agreed a completion date suitable for both buyer and seller. The final sign off will usually include the following documents: sale of business contract, licence to assign, authorised guarantee agreement, deed of assignment of goodwill and any transfer deeds relating to property.

If you are thinking of buying or selling a business we advise getting in contact with a Solicitor as early as possible in the process. We have considerable experience advising clients on all steps of the buying process. Why not call today to set up an appointment or alternatively use the enquiry form on our website.

Tel: 01543 440 308

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