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Buying a UK business involves several steps and crucial legal documentation to effect the sale. This article will consider three important legal documents that can benefit you when purchasing a target business and why they are essential to protect your interests.
LegalVision’s Buying a Business: Guide to Negotiating Terms allows you to protect yourself by understanding which key terms to negotiate when buying a business.
Purchasing an Existing Business
Purchasing an existing business carries potential legal and financial pitfalls, particularly if you fail to conduct proper due diligence. Common risks include the following:
- overvaluing a relatively new business and paying more than it is worth (leading to issues making a profit from the company);
- purchasing a company with a negative image in the UK market (for example, buying a business that has controversial news stories about it online);
- having insecure business financing in place, stretching your finances too far; and
- purchasing a small business with unknown debts and few assets (due to not owning its premises or equipment).
Let us consider several crucial legal documents that are in your best interests when purchasing a UK company.
Confidentiality Agreements
Ensuring that negotiations to purchase a company are kept strictly confidential is crucial. In this way, most prospective business owners will agree on a confidentiality agreement (otherwise known as a non-disclosure agreement).
The prospective new owner and the current owner usually sign a confidentiality agreement to confirm the following:
- that the relevant parties and companies will keep all negotiations and sale discussions completely confidential;
- that the relevant parties can only disclose information regarding negotiations to pre-approved individuals (such as the potential purchaser’s accountant); and
- the only applicable exception is where UK law requires a party to disclose information regarding purchase negotiations (for example, to HMRC or the Competition and Markets Authority).
Most confidentiality agreements will include a clause making clear that any breaching party must pay financial compensation to the other. However, depending on the individuals and companies involved, the damage caused by information leakage can exceed any financial recoupment. This is particularly true when the company is listed on the London Stock Exchange.
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Heads of Agreement
Alongside confidentiality documentation, a head of agreement is usually one of the first documents signed by parties involved in a potential business purchase. This document summarises the prospective sale’s main terms and conditions. So, for example, it may record a target month for purchase alongside a sale price and information on the company assets included in the sale.
Most heads of agreement documents exist as a draft agreement that aims to set the tone of negotiations. In this way, most courts will treat them as suggestive, and the final business sale agreement will override the heads of agreement.
Business Sale Agreement
The business sale agreement is the primary legal document setting out the legally binding sale terms. It should detail the parties’ names, purchase price and date the sale becomes effective.
Additionally, depending on the nature of the business sale, a business sale agreement can also detail the following pieces of information:
- the shares or assets (such as company equipment) included in the sale;
- the payment terms, including details of when the purchase price is to be paid to the seller;
- what constitutes intellectual property and which pieces transfer to the new owner;
- details of warranties between the parties (including promises not to sell company assets before the purchase or make any controversial public statements); and
- information regarding the consequences of contract breach.
Given the importance of precise contract drafting, business owners usually obtain expert legal advice to ensure the wording is accurate and suited to the business purchase.
Due Diligence Documents
Due diligence is a critical part of any business purchase. It comprehensively reviews the target company’s financial, operational, and legal affairs.
As the buyer, you should gather and review various documents to ensure you clearly understand the business you are acquiring.
Some key documents you should review as part of adequate due diligence include:
- the company’s financial statements, including balance sheets, income statements, lists of business assets, and cash flow statements;
- tax returns and records to verify the company’s compliance with tax obligations;
- relevant contracts and agreements, such as customer contracts, employment contracts, intellectual property-related documentation, and leases; and
- environmental, health and safety and industry-specific documentation and policies.
Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA)
The choice between an SPA and an APA depends on the structure of the acquisition.
An SPA is used when buying the shares of a company, resulting in the buyer acquiring the entire company, including all its assets and liabilities. The SPA often includes representations and warranties from the seller regarding the company’s share sale and any attached liabilities.
In contrast, an APA is used when buying specific assets and liabilities rather than the company as a whole. It details which assets and liabilities are being transferred and any conditions or restrictions on the transfer.
The choice between an SPA and an APA can significantly impact the structure and tax implications of the transaction, so it is essential to consult with legal and financial advisors to determine the most suitable approach.
Employment Contracts and Agreements
When purchasing a business, you will likely inherit the existing workforce. Understanding and managing the employment relationships within the acquired company is vital to ensure a smooth transition.
For example, you should review the employment contracts of key employees to understand their terms, including compensation, benefits, and termination clauses. It is also essential to determine whether employees are subject to non-compete clauses that could impact their ability to work in a similar industry after the sale.
Reviewing any employee benefits, pension plans, and contributions is also a good idea, as these can have financial implications for a company buyer. Handling these employment-related documents is crucial to understanding the workforce, retaining key talent, and ensuring legal compliance.
Key Takeaways
Negotiating a business purchase is an exciting endeavour. However, ensuring your dream does not become a nightmare after signing legal paperwork is vital. The most important aspects of a business purchase include good due diligence and ensuring the sale agreement accurately reflects the deal.
If you need help putting legal documentation in place when purchasing a business, contact our experienced business sale and purchase lawyers 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.
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