There are a number of steps that need to be worked through when you are buying or selling a business. These include:
A business can be valued in a number of ways or using a combination of different methods although ultimately, reaching an agreement on price will be a matter of negotiation. Just make sure you bring in an expert to work out the value of the business. Valuation methods include:
If you’re selling a business you’ll probably be liable for Capital Gains Tax (CGT). Get advice from an accountant on how to structure the deal to minimise your liabilities for CGT and make the most of the reliefs available. This could include accepting payment on a deferred basis.
You will also need to ensure that your accounts are all in order before the sale is made so you can finalise your tax affairs and submit final accounts and any other relevant forms pertaining to tax, VAT and National Insurance to HM Revenue & Customs (HMRC).
If you are buying a business it’s an idea to ask for an indemnity from the seller to cover you for any future losses such as penalties resulting from tax or VAT inspections into accounts drawn up before you took over the business.
All prospective buyers should be given a confidentiality or non-disclosure agreement which they must sign before they receive a copy of the sales memorandum. It is up to the seller to check the credit-worthiness of prospective buyers. The sales memorandum is not legally binding but it will give details of:
Purchase offers should ideally be made in writing. They will be made subject to contract (i.e. not legally binding) and should include the terms for seller handover and premises takeover, e.g.: the extent of the purchase (whether premises, business, assets etc); offer price and payment terms; the information requires before a firm offer is made. The seller will compare offers and select a buyer.
Once a buyer has been selected, some initial checks will be made by both sides. This is known as preliminary due diligence. Detailed due diligence comes in at a later stage – see below. If the preliminary due diligence checks are acceptable to both buyer and seller and an initial offer has been made and accepted, the firm purchase offer is negotiated. This is a document called a Heads of Terms agreement which sets out the main points of the sale. It should specify the:
Although some of the Heads of Terms agreement is not normally legally binding, some parts are. These include matters involving exclusivity; confidentiality; warranties; indemnities; and agreements on paying costs if the sale falls through. These issues are usually set out in separate documents and should be carefully checked. If the seller does not meet the preconditions, the sale could fall through, while if warranties are breached, the buyer can claim damages. A seller should never give false or misleading information about company shares as this is a criminal offence.
Detailed due diligence takes place after the heads of terms agreement is signed. It involves the gathering of information about all aspects of the business by the buyer’s solicitors and accountants. What is unearthed during this due diligence process could lead to the terms of the sale being modified. Areas which will be looked at include: profit and loss statements, tax returns, any relevant leases and outstanding loans, with repayment schedules. There are three types of due diligence:
While the due diligence process is in progress there will no doubt be ongoing negotiations between seller and buyer over the drafting of the final sale agreement, or sale purchase contract. Once agreement is reached, the sale purchase contract should be checked carefully to ensure that all agreed terms (plus amendments) are included and that all the necessary details are set out in the accompanying documentation. Most of these documents are drawn up by the buyer's solicitor and each side will receive a copy. They include:
On completion, the change of ownership and directors must be registered at Companies House and the seller must deregister, and the buyer register, for VAT purposes.
Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), when a business is bought or sold, the terms and conditions of the employees who transfer in the sale are preserved so their terms and conditions must remain the same. Affected employees must be kept informed and consulted by the seller and buyer throughout the sale process.
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