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Fidler & Pepper and Your Business:

Buying or Selling a business

Buying or selling a business is a complex legal area. We have put together a brief guide to outline some of the considerations that apply when either buying or selling a business. Every business deal is unique and the purpose of this guide is to flag up some of the potential issues that may arise, it cannot possibly cover everything.

Buying a business is a huge step for anybody to take and the process of doing this can be complicated. We have put together a brief guide to outline some of the key things that a Buyer should be thinking about.

So where do I begin?
When you are buying a business make sure you get advice from a qualified solicitor and accountant at the outset of negotiations as this can help to save time and help the transaction run smoothly.  

What are you buying?
It is essential that the appropriate checks are carried out to ensure that it is clear exactly what type of business you are buying.  An accountant can give you confidence that you are purchasing a viable and profitable business. Once you have confirmed this you will then be able to make an informed decision as to whether there are any contracts, liabilities, employees that you do (or do not) want to take on as part of the deal.

Shares or Assets?
There are essentially two ways that a Buyer can purchase a business.
1. Through an Asset Purchase.  The Buyer purchases the assets of a business directly from the Seller.
2. Through a Share Purchase.  The Buyer purchases the shares of the company and all of its assets and liabilities.
If the business is run by a sole trader or a partnership then there will be no shares to buy. The assets, including contracts and goodwill of the business, will be bought by the Buyer in an asset purchase.  However if the business is a limited company, then the Buyer can choose whether to buy the assets or the whole of the company itself by acquiring its shares. 

Asset Purchase
Under an asset purchase, the Buyer buys some or all of the assets owned by the Seller and it is usually the best route for the Buyer, as it provides the most flexibility and allows the Buyer to choose exactly which assets they want to buy and which liabilities they are happy to take over. This does not include employees as all employees of a business have a legal right to transfer to the Buyer under their existing terms and conditions.  The Buyer will need to carefully consider the terms of employment that are in place as they will become the Buyer’s liability when the purchase has gone through.

The tax position of a Buyer in an asset purchase can be complicated and we are not specialist tax advisors.  A Buyer should seek advice from an accountant on the potential tax implications.  Generally speaking, if an asset purchase involves property or land then the Buyer will be paying Stamp Duty Land Tax at a rate of anything up to 4% of the price of the property.  The Buyer may or may not have to pay VAT on the purchase price agreed; again a suitably qualified accountant can provide valuable guidance on this.

Share Purchase
In a share purchase the Buyer is generally at greater risk, as they step into the shoes of the Company that they have purchased and assume all assets and liabilities. There are however instances when a share purchase is the best option for a Buyer. There may be important and valuable contracts that legally cannot be transferred from the Seller and so the only way to take these on is for the Buyer to buy the shares and the Company itself. 
There are of course tax implications for a Buyer in a share sale (we hate to repeat ourselves but the advice of an accountant is vital!).  Generally speaking the stamp duty costs of a share purchase to the Buyer are more favourable than under an asset sale.  Stamp duty on shares is paid at a rate of 0.5% on the price paid for the shares.

How much is the business worth?
The question of how much a business is worth is a difficult one and arguably there is no right answer as you could receive several valuations which could make it quite difficult to negotiate a price for a business.  We cannot provide specialist advice on this issue, but we have outlined a few common factors which should be considered as part of the valuation process:

  • Past Results of a Company’s financial performance combined with projections for current and future years
  • Profit Growth is a good indicator of a sound and growing business
  • Trends of sales and profit
  • Source of profit – is this a large or small portfolio of clients?
  • Other potential factors – such as staffing, pension costs, redundancy costs to name a few

Past results of a Company’s financial performance provide a useful indicator and should certainly not be ignored.  However they should be combined with projections for current and future years to provide a more all round picture.

Agreeing the terms of the purchase
Once the value of the business has been established, the next step is for a price to be agreed with the Buyer.  When a price has been agreed the deal is on. Before the solicitors deal with the legalities of a purchase, in most matters a document called “Heads of Terms” is created. This document sets out all of the main terms of the deal as agreed by the Buyer and Seller.  This covers everything from the purchase price, timings, what’s included or excluded, warranties and much more. Agreeing “Heads of Terms” should mean that it is less likely that the deal is held up further down the line.

What next?
Once the Heads of Terms have been agreed, the Buyer’s professional advisors will embark on a process known as ‘due diligence’ which is an examination of the legal and financial paperwork to ensure that all is in order.
Selling a business is a complex and involved legal area so we have put together a brief guide to outline some of the things that a Seller should consider to try to make the process as smooth as possible.

So where do I begin?
  • - Always speak to a qualified solicitor and accountant at the outset as this can help to save time and help things run smoothly
  • - Get together all customer, supplier, employee contracts, hire purchase agreements, accounts, accreditations and licences and company books as the Buyer will want to see these
  • - Seek early tax advice from an appropriately qualified accountant to ensure that the timing and structure of the transaction works from a tax perspective
  • - Ensure you guard confidential information by insisting that the parties enter into a non - disclosure agreement (which a solicitor can draft for you) which will protect you from confidential information being used in any way

Shares or Assets?
One of the key issues to consider at the start of a business sale is whether the assets of the business, or all the shares in the company that owns the assets, will be sold. If the business is run by a sole trader or a partnership then there will be no shares to sell. The assets including contracts and goodwill of the business will be sold by the Seller in an asset sale. However if the business is a limited company, then the Buyer can choose whether to buy the assets or the whole of the company itself by acquiring its shares.

There are essentially two ways that a business can be sold:
1. An Asset Sale. The Buyer purchases the assets of a business directly from the Seller.
2. A Share Sale. The Buyer purchases the shares of the company and all of its assets and liabilities.

Share sale
A share sale is the best route for the Seller as the Buyer steps into the shoes of the Seller as shareholder but must still carry out contractual promises in relation to the business. Under a share sale, the Seller can rid themselves of liability for the debts of the company following completion as they will remain with the company itself, not the individual. The tax implications are generally more favourable than an asset sale and more information can be given by a qualified accountant. As a general rule, share purchases are entirely exempt from VAT. The Seller may also be entitled to a relief of 50% on the Capital Gains Tax payable on the sale of the shares.

Asset sale
In an asset sale, the Seller will keep all current liabilities of the business (with the exception of employees) except for those that the Buyer opts to take on. This gives the Seller flexibility that they do not get with a share sale where all assets (and liabilities) are sold. How much is the business worth?

The question of how much a business is worth is a difficult one and arguably there is no right answer other than the price the buyer is willing to pay. It is essential that a qualified accountant is consulted. Arguably, the only valuation with any real substance is the price that the Buyer is willing to pay for the business. There are several factors to consider:
  • Past Results of a Company’s financial performance combined with projections for current and future years
  • Profit Growth is a good indicator of a sound and growing business
  • Trends of sales and profit
  • Source of profit – is this a large or small portfolio of clients?
  • Other potential factors – such as staffing, pension costs, redundancy costs to name a few

Agreeing the terms of the sale
Once the value of the business has been established, the next step is for a price to be agreed with the Buyer. When a price has been agreed the deal is on! Before the solicitors deal with the legalities of a purchase, in most matters a document called “Heads of Terms” is created. This document sets out all of the main terms of a deal as agreed by the Buyer and Seller. This covers everything from the purchase price, timings, what’s included or excluded warranties and much more. Agreeing “Heads of Terms” should mean that it is less likely that the deal is held up further down the line.

What next?
Once the Heads of Terms have been agreed, the Buyer’s professional advisors will embark on a process known as ‘due diligence’ which is an examination of the Seller’s legal and financial paperwork by the Buyer’s professional advisors to ensure that all is in order.


How can we can help?
At Fidler & Pepper we make it our business to help your business:- whether you are just starting out or are well established. We can offer comprehensive and no nonsense legal advice on business matters and with our Business Fixed Fee Menu you will know the costs of this from the outset.

It is vital that you seek the appropriate professional advice to give your business the best chance of success and that is where we come in! Call our Business team on 01623 663246

*In cases where matters become more complicated than envisaged at the outset, we reserve the right to revise any estimate of costs given.