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Before proceeding, you need to ensure that you have a team of professional advisors in place who can work together to support you in your venture. At the very least, we would recommend:-
1)    An independent financial advisor – Buying a private company or business can be one of the highest risk investments that you could make. If you have a pocket of cash, you should first speak with an independent financial advisor to ensure that it is the right option for you and your money.
2)    A CF (Corporate Finance) Advisor – Once you have resolved to buy a business, you need to find one, value it, put an offer in and potentially fund the purchase! This is where your CF advisor comes in who can help you negotiate these elements of the deal as well as considering the right structure for you. Â
3)    An accountant – Not only should you have a Trusted accountant in place to support you and the business post-completion, but you need someone to scrutinise the accounts of the business that you are buying so that you have a comprehensive understanding of any historic risks, anomalies and particularly future prospects and your return.
4)    A tax advisor – transactions can be structured a multitude of different ways. A tax advisor can work with you to explore the options from a tax perspective and advise you on the various consequences of the deal. This will also be a particular concern for the Seller therefore having an advisor enables you to also understand their position and successfully navigate the deal.
5)    A solicitor – once the deal is agreed in principle your solicitor will work with you not only to undertake due diligence so that you are appraised of any risks from a legal perspective of the business that you are buying, but also to prepare and negotiate the transaction documents and effecting the transaction.
Once you have your team together and a target in mind, you will need to consider the structure of the transaction and how you are going to work the deal. There are several different factors that you will need to consider:-
1)    Asset Sale vs Share Sale – If the business you want to acquire is traded through a limited company, you could consider buying the shares in that company. However, this would mean that you take on both the assets and the liabilities of the Company indirectly. Therefore, before agreeing this route you should ensure that there are no liabilities that are particularly onerous or would not want to assume (for example historic tax claims) and that the business of the company comprises of the business you want to buy – i.e. there aren’t any other businesses operated through it which you don’t want to acquire. Due diligence therefore becomes particularly prudent if considering this route.
The alternative is that the company sells its business to you as a going concern. This can benefit you as a buyer as you cherry-pick the assets you want and don’t automatically assume liabilities unless you agree to take them on. However, this can have tax implications for a seller and it can be more complicated if there are particular assets or contracts that need to be transferred to you. For example, those subject to asset finance or material customer and supply contracts requiring consent. If this is the case, a share purchase may be more appropriate to ensure continuity of the business.
There is no ‘one size fits all’ in a transaction and it is important that you get the structure that is right for you.
2)Â Â Â Â Payment on Completion vs Deferred Consideration
Another key factor in a sale structure is when you will pay for the shares. Naturally, a Sellers preference would be for you to pay for the shares up front. However, there may be many reasons why this isn’t advisable. For example:-
a)    From a legal perspective, there is always the risk that what has been presented to you through the negotiations or warranted to you to induce you to proceed transpires to be untrue and gives rise to a claim. If this is the case, you would be better to be able to set-off the Seller’s liability due to you against the deferred consideration you owe them. Otherwise, you could end up chasing a debt you never realise. Â
b)Â Â Â Â From an accounting perspective you may not have the cash to pay the entire purchase price on completion (as the purchase price may take account of more than the net asset value of the company and could factor in, for example, a multiple of EBITDA and potential future earnings). Therefore, it may be necessary to defer payment of some of the purchase price to enable the funds to be raised.
c)Â Â Â Â From a commercial perspective, you may agree for the purchase price to vary depending upon whether or not certain targets are met and post-completion performance of the company. Therefore, this part of the purchase price would be deferred depending upon the outcome.
3)Â Â Â Â Post-Completion Adjustments
There are many different adjustments to the purchase price that can be made post-completion.
The purchase price may be adjusted to reflect the actual net asset position of the Company on Completion or to take into account the cash in the bank (subject to any indebtedness and there being sufficient working capital) as at completion. These are commonly referred to as a ‘net asset adjustment’ or a ‘cash free/debt free’ deal.
The purchase price could also be adjusted depending on post-completion performance of the Company, this could take the form of an ‘Earn-Out’ if the seller is staying on post-completion or even be a direct reduction if the Company’s financial position isn’t maintained, or conversely uplift if it performs!
Ultimately, if there is to be any variation of the purchase price your documents have to be carefully drafted so that they are clear, concise and include accountability provisions and the ability for you to fairly challenge any variation.
The above are just some examples of structure variations that may need to be factored into your deal. At the end of the day, each transaction is unique and it’s important that you consider the structure with your professional advisors to ensure that it works for you.
Buying a business isn’t the same as your average property conveyance, although the process may appear similar as it involves due diligence and enquiries, a contract for sale, exchange and completion.
1)    Heads of Terms – one of the first documents you will need to agree is your Heads of Terms. These set out the headline terms for the deal and should accurately represent the parties’ agreement and on what basis they are willing to proceed. Whilst on the whole these are not legally binding, there are some provisions which will be including confidentiality and exclusivity. Therefore, it is important to ensure that these are fairly drafted and that you are fully appraised of what you are committing to before proceeding.
2)    Due Diligence and Enquiries – Once you have Heads of Terms signed, you will need to undertake legal due diligence enquiries. This is a series of questions about the business you are buying, its assets and historic trading position. There are usually 4 limbs to these enquiries 1) Commercial (so that you have a full understanding from an operational perspective how to run the business once you take control) 2) Accounts (so that you are fully appraised on the basis upon which the company accounts for its income and to ensure that the expected income from your investment aligns with the accounting principles adopted by the Company) 3) Tax (so that any tax risks, anomalies or filing issues with HMRC are picked up and can be addressed as a part of the transaction) 4) legal – these are especially important as they address how the business has been conducted to date with a view to flagging any risks and liabilities associated with the business you are buying or structure of the deal.
3)    Legal Documents – Once you have a comprehensive understanding of the business the paperwork to govern your transaction can be prepared. This will consist of a series of legal documents from your sales contract (which may take the form of a Share Purchase Agreement or Business Sale Agreement depending on your structure) through to a Disclosure Letter and ancillary documents required to effect your transaction itself. These need to be carefully drafted and negotiated to ensure that they comprehensively reflect your deal and minimise the risk to you.
4)    Exchange and Completion – Once the legal documents are in agreed form, the final stage in your transaction is exchange and completion. Exchange and Completion is often simultaneous in these deals, so the point where you are legally bound is also the point where you get the keys to the business. This does mean that it is quite common to be negotiating to the wire – but an experienced team behind you will not only have the skill, but the stamina, to handle this!
5)    Post-Completion – What happens after completion is just as important as the preceding stages to make sure that all necessary formalities are attended to. This includes payment of stamp duty where due, filings at companies house and updating Statutory Books where necessary. An experienced legal team will be able to attend to this and support you where necessary with any queries that you have on what is needed to finalise your deal.
Any business purchase needs to be governed by the appropriate legal documentation. Failure to engage properly in the legal process can result in a lack of protection, ambiguity and ultimately expensive and costly litigation. Legal documentation need not be daunting, and your legal advisor should guide you not only through the process but the documentation and what the implications are for you in the long-term. Some of the key documents you can expect to encounter include:
Sale and Purchase Agreement – depending on the deal structure that works for you this would usually take the form of a Share Purchase Agreement or a Business Sale Agreement. This will contain the operative provision for your transaction including your purchase price and when this is due, warranties and restrictive covenants to protect you and your investment. Â
Disclosure Letter –  this is a formal letter to you as a buyer notifying you of facts or circumstances which are inconsistent with the warranties being given in the purchase agreement. It is therefore important that this is scrutinised and negotiated so that you are fully appraised of the risks you are taking on in the deal!
Ancillary Documents – these are a series of documents which are necessary to effect the transaction. These will include Stock Transfer Forms, Board Minutes, Resignation and Appointment Letters and Companies House Returns. Many of these will be required as a completion deliverable, but they can also stand in evidence of certain agreed matters and therefore it is fundamental that they are accurate and carefully drafted.
Ultimately, the documents for your transaction will vary depending on what the parties agree. Your solicitor should guide these through these and ensure that the necessary documents are effected and agreed to ensure the transaction works for you.
If you have any questions about buying a business, please don’t hesitate to contact our team of experts who are on hand and ready to help you.
