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Buying a business. What’s involved?

17th March 2016

You’re ready to buy your business – it may be the culmination of years of planning. What are the main things you’ll need to consider?

Firstly, how will you structure your purchase? You can buy either the shares of the company that owns the business, or just buy the assets of that business. If you buy the shares you buy the whole company (including liabilities that you may not know about). If you buy assets you can choose which ones to buy, which provides more flexibility, but it can be complicated to identify and transfer specific assets. A key consideration will be tax – asset deals are typically less tax efficient for sellers than share deals, which can affect the price you pay.

Secondly, you need to think about employees. If you buy a going concern, you take on the employees on their existing contract terms. You may also have to take over existing pension arrangements or offer pension arrangements to employees.

Ask your lawyer to carry out further checks – known as due diligence. The purpose is to investigate the assets and liabilities of the business before you commit. Areas covered will depend on the business but might include checking ‘intellectual property’. A brand, trade mark or patent may be the most valuable asset. Check that the seller owns the rights, and has protected them.

Next investigate whether there are environmental issues. You could face huge liabilities if there is contaminated land or you buy a company that caused contamination.

Finally, ask the question, ‘Does the business own its IT systems and will you be able to use them?’

If all is well you will then sign an acquisition agreement setting out the agreed terms. Typically it will contain warranties, which are promises by the seller about aspects of the business – for example, that it owns all the assets and there are no disputes. If they are untrue, you can sue for damages.

Signing the agreement and completion are often simultaneous, but a gap may be necessary if there are completion conditions to be fulfilled. For example, informing and consulting with any transferring employees.

If there is an interval between signing and completion, additional issues will need to be addressed in the acquisition agreement, including how the target business will be operated between signing and completion.

This note only provides an overview of the law. You should talk to a lawyer for a complete understanding of how it may affect your particular circumstances.

Robert Enticott. Partner and Head of Business Services

Business, Commercial Property, General, George Ide, News
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