Buying an existing business is often the route of choice for people just starting out, and for ambitious business owners with their sights set on expansion. But, as TM Law solicitor Aidan Squire explains, agreeing a fair price is just the beginning…
So, you’ve decided you want to buy a business. You’ve secured the capital you want to invest, selected the perfect candidate business, and agreed a fair price with the help of your accountant [based on current performance – reflecting current fixed assets, order book and recent turnover].
The company’s owners are now ready to sign on the dotted line and are pushing for a sale, but which legal route should you take?
Buying a Business – The Two Legal Routes
- Route One – Buying all Shares
In this legal route you buy all the shares from the owner, or shareholders – purchasing the whole business, lock stock, and barrel.
There are positives to choosing this route. If the deal involves leasehold premises, you won’t have to enter into separate negotiations over the lease, instead you’ll simply require the shares and the ownership of the company.
You won’t need to deal with taking on individual contracts that are part and parcel of the running of the business. The customers of the business will be more likely to continue using your service once you take over and disruption would be kept to a minimum.
Finally, all you need do to finalise the deal is receive the Share Certificates and Stock Transfer Forms then pay over the money. You don’t even have to engage a solicitor.
“In my experience the seller will almost always push for a ‘lock, stock, and barrel’ agreement”, says Aidan.
“It can work. But be wary. This may seem like the simplest route – but it leaves you open to ramifications later”.
Here’s why…
When you buy a company by purchasing all its shares, you not only take on the good bits, but you also are obliged to take on the bad bits too. The bad bits could include disputes with customers or suppliers and any back taxes owed that might come to light later on. This includes disputes with HMRC over taxes that might or might not have been paid.
- Route Two – Acquiring Assets and Goodwill
To safeguard against ramifications later our professional legal advice would always be to consider whether you can acquire the business by purchasing the assets and goodwill separately.
“Could you form a Company and acquire the assets, then continue trading? Or if you have an existing business, could you assimilate the assets of the business you intend to purchase?” asks Aidan.
“Whatever difficulties you might envisage by this apparently piecemeal approach, suddenly a huge area of risk is removed. You only get what you pay for and you do not acquire anything unexpected and potentially hugely expensive.”
Legal Pitfalls
- Acquiring Assets and Goodwill separately is not always possible. Often the seller of the business is unwilling to consider this approach as they’d rather the simplicity of an all shares route.
- If you decide on an all shares route, then be prepared for extended due diligence to mitigate the risks you’ll take on through the sale.
- Lapses in communication can cause unnecessary delay, impede the sale, and leave you exposed to risk. Ensure that enquiries relating to disclosure are driven by your solicitor, with the ongoing support of your accountant.
- A sub-standard contract won’t provide you with enough protection and/or will fail to reveal matters which may cause you to reassess the acquisition of the business.
- Detailed analysis can be time consuming and costly [but will give you confidence in the sale].
At TM Law we have a small team of lawyers and support staff who can advise from the outset and guide you through the intricate process of buying a business, from the legals as we covered in this blog, to the creation of partnership agreements and exist strategies, as we dealt with in another blog recently.
An initial consultation will not cost you anything if you proceed with the transaction, and you can act with confidence that the transaction is right for you.
TM LAW
Legal Advice for your Business
About TM Law – Specialist Commercial Law Solicitor
Based in Wickford, Essex, TM Law is a small and dedicated solicitors. With many years’ experience, helping business owners and local individuals with matters of commercial law, personal injury, compromise agreements, employment disputes, debt collection, commercial disputes and much more.
