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Simon Hore



19th June 2018



How to buy a business

Buying a business can be a confusing and complicated process. To ensure success, there are some key steps to consider along the way.

Buying a business can enable you to expand into a new market that is complimentary to your own, or simply boost your existing business by acquiring a competitor. If you’ve identified a great opportunity, increase your chances of commercial success by understanding what’s involved in the buying process.

Initial viewing and valuation

Your accountant and other professional advisers can assist you in valuing the business you intend to buy, but matters to consider will include the business’ trading history, current performance and future projections, as well as cashflow, debts and working capital requirements.

Don’t forget to consider intangible assets such as the company’s goodwill and any intellectual property. Consider why the business is being sold. Is the business involved in any major outstanding litigation? Are there any upcoming regulatory changes likely to have an impact on the business? Investigate how much other businesses in the sector have sold for and whether there are competitors currently on the market.

Arrange funding

Having arrived at a headline figure of what you are willing to pay, you need to consider how you are going to fund the transaction. If you are not relying on your own resources, lenders will require details of the business you wish to buy, plus financial information such as accounts and financial projections. They will also require sufficient security for their lending. In the later stages the lender’s lawyers will also review the transaction documentation to ensure the borrowed funds are being invested securely.

Heads of terms

The crucial initial stage will be to sign heads of terms outlining the main terms of the transaction. Heads of terms are generally not legally binding, but are a helpful to record the parties’ agreement on key issues.

Having reached this point the seller may agree to an exclusivity period during which they will not engage with other prospective buyers about a sale, giving you the opportunity to conduct your due diligence on the business and generally conclude the transaction.

Due diligence

Once your offer has been accepted, you will gain full access the business’ books and records. This is known as the due diligence exercise and your accountants and lawyers will lead this process to help you identify any areas of risk. Through thorough due diligence, a clear picture should emerge of the business’ current performance, together with a realistic view of its future potential. Due diligence should uncover any issues or problems that might require protection from the seller under the sale agreement or in some cases lead to a renegotiation of the purchase price. Thrings is able to provide access to an online data room facility, which enables due diligence to be carried out as efficiently and easily as possible.

There are three types of due diligence – legal, financial and commercial. Legal due diligence includes checking that the business has legal title to sell, that all assets are properly owned, terms applicable to the workforce and that any regulatory or litigation issues have been addressed. Financial due diligence involves reviewing and verifying the accounts of the target business to ensure there are no hidden issues that could cause problems for you or which might affect the proposed purchase price acquisition. Commercial due diligence covers matters such as looking at the business’ place in the current marketplace and analysing competitors.

Negotiate the sale agreement

There are two principal methods of buying a business – an asset sale or a share sale. There are advantages and disadvantages to each. A share sale is usually more tax-efficient for the seller, whereas a buyer may prefer an asset sale so that it can cherry pick which assets to take on and which to leave behind.

In each case you as the buyer will be responsible for the preparation of the first draft of the purchase agreement. In the case of an asset sale, there will be additional matters to resolve including the assignment or novation of customer contracts, obtaining landlord consent and assigning leases for the business premises and dealing with legislation that protects the rights of employees.

The purchase agreement will contain protection for you as the buyer in the form of warranties and indemnities, informed by the due diligence process. As a buyer you will also require the inclusion of restrictive covenants in order to protect the value of the business you are buying. As part of a share purchase a tax covenant will provide you with protection for any tax liabilities that predate completion.

Disclosure letter

A disclosure letter enables the seller to make disclosures against the warranties it is giving in the sale agreement to highlight any unusual or onerous elements of the business. If the seller does not make adequate disclosures, you may be able to recoup some of the purchase price paid by way of a breach of warranty claim.

No matter how thoroughly you approach your due diligence, the disclosure letter is likely to raise additional questions and issues that may require negotiation with the seller. As the buyer, it is vital that you take the appropriate professional advice in order to fully understand the consequences of accepting the seller’s disclosures and what your associated risks are.

Completion accounts

Completion accounts provide a mechanism to adjustment  the purchase price by reference to the business’ exact financial position at completion. The principles on which such accounts are to be prepared are crucial and will be incorporated in the sale agreement.

Other issues

There will be a myriad of other issues to consider along the way. For example, if you are buying part of a business, there might need to be a restructuring exercise, such as transferring part of it into a subsidiary company before the purchase can take place. Additionally, you may need to consider if there is to be a split exchange and completion, for example where consent from a regulator or key customer needs to be obtained, or where there are competition law issues to be resolved.

Thrings’ highly experienced Corporate team can assist you in ensuring that the process of buying a business runs as smoothly and efficiently as possible, helping you to realise your commercial ambitions.

The Legal Guide To Due Diligence When Buying Or Selling A Company

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About The Author

Simon Hore - 
						
							
								Partner

Simon Hore
Partner

6 Drakes Meadow
Penny Lane
Swindon SN3 3LL

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