Most people who buy a business have already fallen for it a little. They know the market, they can see the opportunity and they have usually agreed a headline price before a lawyer is involved. That is completely normal. The legal work is not about talking you out of the deal. It is about making sure you understand what you are buying, what could go wrong and who carries the risk if it does.

Here are the main points we usually talk through with a buyer at the start.

Share purchase or asset purchase?

The first big question is what you are actually acquiring. There are two broad routes.

Buying the shares

On a share purchase, you buy the company itself from its shareholders. The company carries on exactly as before, with the same contracts, employees, assets and bank accounts. Only its owner changes. That continuity is often attractive, because customers and suppliers may not need to be asked for consent (although some contracts contain “change of control” clauses, which are worth checking).

The flip side is that the company also keeps its history. Any past liabilities, such as old tax problems, disputes or regulatory issues, stay with the company, and so indirectly become your problem. That is why the checks and contractual protections matter so much on a share deal.

Buying the assets

On an asset purchase, you buy selected parts of the business from the company that owns it: perhaps the goodwill, equipment, stock, intellectual property and some contracts. The seller’s company is left behind, along with most of its historic liabilities. You can, to a degree, choose what you take.

Asset deals can involve more practical work. Contracts may need to be transferred with the other party’s agreement, leases may need the landlord’s consent to assign, and each asset has to be identified properly. Tax treatment also differs between the two routes for both buyer and seller, so the structure is often a matter of negotiation and should be discussed with your accountant as well as with us.

Agreeing heads of terms

Once the outline is agreed, it is usually sensible to record it in heads of terms, sometimes called a term sheet or letter of intent. This sets out the price, how and when it will be paid, the structure, the key conditions and the expected timetable.

Heads of terms are normally not legally binding on the main commercial points, but they carry real weight. They set expectations and make it harder to reopen issues later. Some parts are usually intended to be binding, such as confidentiality and, often, a period of exclusivity during which the seller agrees not to negotiate with anyone else. It is worth taking advice before signing them, because it is much easier to shape the deal at this stage than once the documents are being drafted.

Due diligence: finding out what you are buying

Due diligence is the investigation a buyer carries out before committing. It usually runs on three tracks: financial (often led by accountants), tax, and legal. On the legal side we would typically look at:

  • the company’s constitution, share ownership and any shareholder agreements;
  • key customer and supplier contracts, including termination rights and change of control provisions;
  • property, whether owned or leased, and the terms of any leases (see our commercial property page);
  • employees, their contracts and any ongoing issues;
  • intellectual property, and whether the business actually owns what it relies on;
  • any past or threatened disputes, and relevant licences or regulatory requirements.

The aim is not to find a reason to walk away. It is to understand the business well enough to price it properly and to know which risks need specific protection in the contract. Findings sometimes lead to a price adjustment, a special indemnity or part of the price being held back.

Warranties and indemnities

The sale agreement will usually contain warranties. These are statements by the seller about the business, for example that the accounts are accurate, that there are no disputes other than those disclosed, and that key contracts are in force. If a warranty turns out to be untrue and the business is worth less as a result, you may have a claim against the seller.

The seller responds with a disclosure letter, which lists exceptions to the warranties. Anything fairly disclosed generally cannot be the subject of a later warranty claim, so the disclosure letter needs to be read carefully alongside your due diligence.

An indemnity is different. It is a promise to reimburse a specific loss pound for pound if a particular known risk materialises, such as an identified tax issue or a live dispute. On a share purchase there is often also a tax covenant, which works in a similar way for pre-completion tax liabilities.

Sellers will usually want to limit these protections by time and amount, and those limits are a normal part of negotiation. It is also worth thinking about whether the seller will actually have the means to pay a claim later, which is one reason why deferred payments or retentions are common.

Employees and TUPE

On an asset purchase, the Transfer of Undertakings (Protection of Employment) Regulations, known as TUPE, will often apply. In broad terms, the employees who work in the business transfer to the buyer automatically, on their existing terms and with their service and most employment liabilities coming with them.

TUPE also brings duties to inform and, in some cases, consult with affected employees, and dismissals connected with the transfer can be unfair unless there is a specific, recognised reason. Buyers who plan to change terms or restructure after completion need advice before they commit, not afterwards. Our employment law for employers team usually works alongside the corporate team on this.

On a share purchase, TUPE does not normally apply because the employer, the company, does not change. The employees simply stay employed by the company you now own.

Other points to settle before you commit

A few other issues often come up:

  • How the price is paid. All at completion, in stages, or partly linked to future performance (sometimes called an earn-out). Each has different risks for each side.
  • Restrictive covenants. You will usually want the seller to agree not to compete with the business or poach staff and customers for a reasonable period.
  • Consents and approvals. Landlords, lenders, key customers and, in a small number of sensitive sectors, government notification may be needed before completion.
  • Funding. If you are borrowing to fund the purchase, the lender will have its own requirements and timetable.
  • The handover. Access to systems, passwords, domain names and supplier relationships sounds mundane, but it matters on day one.

If you are buying a family-run business, or planning how you will eventually pass on or sell the business you are buying, our business succession planning work may also be relevant. You can read more about how we support buyers and sellers on our corporate and commercial page.