How to Limit Legal Risk When Purchasing a Business

Acquiring a business is an exciting opportunity, but it also carries legal risks that can have significant consequences. When purchasing a business, it is crucial to understand and mitigate these risks to protect your investment. By doing so, you can safeguard against potential liability and maximise the chances of a successful business acquisition. This article will provide essential guidelines to help limit legal risk during a business acquisition.

1. Conduct Comprehensive Due Diligence

Thorough due diligence is the cornerstone of any successful business acquisition. It involves a comprehensive review of the target business or target company’s financial and operational performance and legal compliance. It is helpful to obtain legal advice to identify potential risks and liabilities associated with the target business or company, including: 

• material contracts with customers and suppliers;
• financial statements and tax records;
• property licences or leases;
• business permits or other government authorisations;
• intellectual property (IP); and 
• ongoing litigation with suppliers, employees or customers.

Pay particular attention to any outstanding legal disputes, compliance concerns and the company’s financial health that may impact the company’s value or future operations. By conducting rigorous due diligence, you can uncover high risks and make an informed decision to either walk away from the deal or negotiate appropriate provisions within the purchase agreement.

2. Engage Competent Legal Advisors

Engaging expert lawyers specialising in mergers and acquisitions is essential in ensuring good legal risk management. These experts can guide you through the complexities of the acquisition process.

Expert UK lawyers can help you navigate through due diligence and assist in drafting and negotiating critical documents such as: 

• term sheets; 
• purchase agreements;
• nondisclosure agreements; and 
• shareholder agreements and articles of association; 
• new leases or existing lease assignments; and 
• contractor and employment contracts.

Drafting robust contracts will help protect your interests and minimise the risk of future legal disputes.

3. Identify any Employment Law Risks

Employment law is a critical area of concern when purchasing a UK business. Reviewing existing employment contracts, collective agreements, and employment tribunal litigation or personal injury documents is good practice for identifying potential liabilities or compliance issues.

Understanding the target company’s or business’ obligations regarding employee rights, redundancy procedures, and any previous or prospective transfer of employment contracts under the Transfer of Undertakings Protection of Employment Regulations (TUPE) will be key to mitigating risks and ensuring a smooth transition for employees.

4. Assess Compliance with Regulatory Obligations

Ensure that the target company or business provides such additional information to satisfy you of their compliance with all relevant regulatory obligations and additional requirements. An important area will be their compliance with relevant data protection laws and the ability to hand over personal data to the purchaser. 

Before purchasing, you should thoroughly examine relevant licences, permits, certifications, and registrations to confirm their validity and compliance status. Understand the company’s adherence to: 

• industry-specific regulations;
• data protection laws;
• health and safety standards; and 
• environmental requirements.

Non-compliance can lead to significant legal consequences, penalties, and damage to the company’s reputation and business relationships. Engage legal experts with expertise in the relevant regulatory fields to assess compliance and identify areas with high-risk levels.

You should also consider conducting environmental assessments, including evaluating: 

• potential ecological liabilities;
• contamination issues; and 
• compliance with environmental permits and regulations. 

Environmental risks can have long-term financial and legal implications, so it is crucial to thoroughly evaluate and address them during the due diligence process.

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5. Purchase and Sale Agreement

A well-drafted and carefully negotiated purchase and sale agreement is essential for minimising legal risks. Expert lawyers can provide professional advice on identifying key risks in the purchase agreement and whether terms are market standard.

This will include dealing with the important areas : 

• conditions precedent; 
• warranties;
• indemnities ; and
• completion obligations; and
• limitation of liability clauses.  

Key Takeaways

Purchasing a UK business involves inherent legal risks that you should effectively manage to safeguard your investment. By conducting comprehensive due diligence, engaging expert lawyers, addressing employment law and regulatory compliance, and crafting a well-drafted purchase agreement, you can limit legal risks and increase the chances of a successful business acquisition.

While the above steps can take a long time, or at least a longer period than not bothering with them, there are good reasons behind performing them. Most lawyers will quickly point out that failing to follow the above general principles and steaming ahead within a short time limit can soon end in disaster.

If you need legal assistance limiting legal risk when purchasing a UK business, our experienced business sale lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.