Buying the Assets of a Business – Key Considerations.
When purchasing a business it is important to decide at the outset whether you are buying the shares in the company that runs the business in question or if you are buying the assets of that business. This is something which you should discuss with an Accountant, however, if you decide, following advice, that you are going to acquire the assets in the business then you should consider the following;
What assets are you buying?
When you agree a purchase price for the assets of a business it is important to be clear from the outset what you are buying. This seems like an obvious statement but many people often believe they will acquire certain assets which the seller then excludes from the sale once documentation is drafted.
The assets of a business (amongst other things) can include;
- Goodwill
- Equipment
- Stock in Trade (in some instances stock will be valued at completion and the price of the same will be payable in addition to the agreed purchase price).
- Property
How will income of the business be divided between the Buyer and Seller?
The standard position is that any amounts received on or before completion so far as they relate to a service to be provided after completion belong to the buyer and seller must pay the buyer such sums. Any amounts which are paid after completion for services received before completion belong to the seller and the buyer will need to pay such sums to the seller.
In essence a line is drawn at close of business on the day of completion. Any payments made or received before that line is drawn are for the seller, after that time everything belongs to the buyer.
You should therefore consider if the nature of the business is such that this standard position should be altered and that the ‘Business Sale and Purchase Agreement’ properly deals with this.
Are there any employees of the business?
It is extremely important that you ascertain at the outset whether you will be acquiring any employees of the business when purchasing its assets.
If any employees are transferring with the business the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will apply and you should seek the advice of a Employment Law Solicitor to ensure that the correct steps are taken in accordance with TUPE (Mayo Wynne Baxter have a specialist Employment Team who can assist).
Are there any business contracts which will continue post completion of the purchase?
This question is often answered as part of the due diligence process which you should instruct your solicitor to undertake for you before you commit yourself to the purchase of a business.
A business contract would be described as any or all contracts, arrangements, licences and other commitments relating to the business entered into before completion which remain to be performed by any party to them in whole or in part.
It goes without saying that you should be aware of any business contract which remains to be performed as this will be your responsibility and a potential liability for you following completion.
Are there any tax implications associated with the purchase?
This is something which should be discussed with your Accountant however some tax considerations include;
- Whether the seller is VAT registered and whether the transaction will be treated as a ‘Transfer of a Going Concern’ (a TOGC).
- Whether the seller has opted to tax the property (if they hold a freehold interest) or whether the landlord of the property has opted to tax it (if the seller has a leasehold interest) as VAT will then be payable on any payments due under the lease.
- Whether Stamp Duty Land Tax is payable on either the acquisition of the freehold of the property or any lease of the same.
Restricting the Seller
In order to protect the assets which you are purchasing you may need to restrict the seller’s actions moving forward i.e. to restrict the seller from:-
- Carrying on the same business as is being sold within a give time frame of completion and within a certain area e.g. within 2 years following completion in Brighton and Hove
- Seeking the custom of any client or customer of the business within a certain period of time from completion
- Engaging or employing any employees of the business.
- Using the business name or any other domain name, design, logo or trademark of the business.
If you do not restrict the seller you could in theory find yourself in a situation where the seller sets up an identical business next door to the business which you have just bought and this would, of course, have an impact on the performance of your new business.
Next Steps
A properly drafted ‘Business Sale and Purchase Agreement’ will cover all of the points highlighted above and you should ensure that you instruct a solicitor to undertake a full review of the business including the title to any property which will be occupied (whether that be freehold of leasehold) before committing yourself to the purchase of a business (this process is known as ‘due diligence’). Your solicitor can then advise you on any potential liabilities and ensure that suitable warranties are included within the ‘Business Sale and Purchase Agreement’ to safeguard you moving forward.
If you are looking to purchase a business (by way of shares or assets), please contact the specialist Commercial Team at Mayo Wynne Baxter, who will be happy to assist you.