From a legal point view, every business bought is unique with its own specific combination of factors and legal issues that need to be dealt with. However, there are similar aspects that are common to the majority of business sales. In this article we’ll be looking at the key legal issues and steps involved when it comes to conveyancing (legally transferring ownership) and how to buy a business, so you can start the process fully informed and prepared.
Due Diligence
Due diligence is the process in which you research the business you want to buy to make sure it is legitimate and worth the value that you are prepared to pay for it. This can be done before you bring in a solicitor or after. Part of the process might involve you looking at the condition of the business’ physical assets.
You will want to see the business accounts and it will be beneficial to get your accountant involved as well. It’s important to check that there is nothing that will negatively affect the value of the goodwill you will be buying.
Even though most of the due diligence will normally be carried out before the solicitors get involved, there are several issues which your solicitor will look at in more detail. For example, if you’re interested in commercial property in Newcastle, our Toomey Legal team can help you with all aspects of conveyancing. Also, it might include things like raising detailed questions with the seller’s solicitor and acquiring detailed technical information for you to consider when purchasing a business.
Heads of Terms (or Memorandum of Sale)
Heads of terms or a memorandum of sale is a document that lays out the key terms and details of the agreement made between the buyer and seller. It’s not a legally binding document necessarily, it more resembles an agreement in principle. Essentially it is the main terms that you have “shaken hands on” but almost always add to a legal contract later on. This means that all parties can pull out or try to renegotiate at any time until a formal contract is drawn up.
The heads of terms most of the time is drawn up by the seller’s business transfer broker/agent. There is one exception though which is in business transfers that are a lot bigger and more complicated than usual. In these cases, solicitors might be involved in putting together heads of terms, but this is definitely an exception and only occurs in rare circumstances when buying an existing business.
Despite heads of terms not being legally binding, the parties and agent/broker often regard them as being morally binding so don’t take too well to any significant attempts to renegotiate the terms. Therefore, it is important that you check you’re fully happy with everything before putting your name to them. It is recommended that you get your solicitor to have a quick look over the draft heads of terms before you commit to them.
The document will include information like the parties involved and their solicitors as well as setting out the sale price, the assets being sold, and the assets that might be excluded from the sale. Often there will be a proposed completion date, an outline of employees, stock, details of the lease, and the landlord’s details, and any other specific features the parties may have agreed to.
The contract
Normally, the seller’s solicitor will draw up the first draft of the contract for selling the business. Even when the sale of the business is fairly straightforward, the contract will still be a detailed and complex legal document. This is because every business that gets sold is different, so every business sale contract will be different.
Naturally, the first draft that is put together by the seller’s solicitor will be done in a way that favours the seller. Your solicitor will then make changes and additions to balance it back in your favour, ensuring your interests and priorities are acknowledged and addressed properly. So, the final version of the contract might look very different from the first one.
There are a number of reasons why having solicitors work on a contract for everyone to agree on is important. One of the main ones is that having a written contract that clearly and accurately details what is happening, what is included in the sale, and what is excluded, minimises the risk of misunderstanding and errors.
The contract will fully outline the legal rights and obligations of both the buyer and the seller. When there is an agreement, but the rights and obligations aren’t properly defined legally, there is room for disputes to arise and the agreement might end up being worthless.
Additionally, the contract defines the transition of legal ownership of assets, giving effect to a change in ownership so that you, as the buyer, officially own the assets you’re paying for. The contract needs to be right, or you could easily discover that you have paid a lot of money to not legally own what you thought you were getting.
This could seriously affect your life, so it is a good idea to have an experienced solicitor to work on your behalf to check the contract is watertight and covers all the bases you need it to.
Restraint of trade clauses
There are certain types of clauses that you might want to be included in the contract and your seller might want to be excluded. Restraint of trade clauses are where the seller is restricted on what they can do once they have sold their business to you.
Sometimes they are necessary to protect your interests and the value of the business you’re buying. For example, you don’t want to pay a large amount of money for a business for the seller to set up a new business close by in competition with you, or for the seller to poach your staff and customers.
Business premises
Most of the time, business premises will be leased, and it will mean that the landlord needs to provide formal consent to transfer the lease and they will likely add a range of conditions. A common condition is that the seller, as the outgoing tenant has to act as guarantor until the end of the lease.
When a lease is sold as part of the business, the landlord will ask both the buyer and seller to sign up to a separate legal document called the “licence to assign”. This is basically a separate three-way contract setting out the landlord’s conditions for formal legal consent and states the obligations of each party.
Completion
Completion is the legal term to describe when the sale and purchase has gone through, and the business is transferred from the seller to the buyer. You will agree on a completion date with the seller. One the completion day, the solicitors will sort out the last bits of legal formalities.
They will typically do this over a phone call with the final paperwork being exchanged afterwards. This stage of the process will involve writing in the dates and authorising final sign off on all the various legal documents.
The complete range of documents that are signed off during completion often include: sale of business contract, deed of assignment of goodwill, licence to assign, authorised guarantee agreement, and transfer deed for legal transfer of freehold or leasehold property.
Conclusion
Hopefully this guide covering the main parts involved in the conveyancing process for buying a business has been useful for you and you will go in more prepared if you are purchasing or selling a business. Our conveyancing solicitors Newcastle have extensive experience and skills in their field and will help you with all the legal workings to ensure your purchase goes as smoothly as possible. Contact us today to discuss your needs with one of our friendly team members.