The best legal advice on buying a business

By Daniel Russell

What’s involved when one business wants to buy another one?

If I asked you to go and buy a couple of pints of milk, it would be a relatively straightforward task with very few factors to be considered, right? You’d probably check the use-by date to make sure it would last the longest possible time. And that would pretty much be that.

Buying a car? A little more involved. There’s service history to think about, MoT history to check, mileage and bodywork condition to consider. You’d probably want to do an HPI check, too, if it were a private sale.

As transactions get bigger, they get more complex until you reach a level of intricacy where the sums of money and legal liabilities involved are such that getting the right legal advice is absolutely critical in order to ensure you don’t make a possible catastrophic mistake.

Buying a business falls into this category and although it’s certainly possible to acquire a business without hiring a lawyer to protect your interests, I can think of no sensible reason why you might want to do so.

The reverse is also true – if you’re selling your business, you’d want the peace of mind that comes from knowing your best interests are being looked after.

So, whether you’re a sole trader buying out another sole trader, a partnership looking to acquire a competitor or a large business expanding through a takeover, at the heart of task in hand is the need for meticulous due diligence to be carried out.

Like so many things in life, there’s always the potential to uncover a nasty surprise along the way. Or, much worse, for that nasty surprise to remain hidden if you haven’t got the right set of eyes looking for it.

Here’s a useful checklist of what to consider if your business has grown to the point where a merger or acquisition – however large or small – might be on the cards:

How should my business be structured?

What footing should the new business be put on once the purchase has been completed? You may be a sole trader who would be better served operating as a limited company, or it could be more appropriate for the new business to operate as a partnership.

There will be different tax and financial reporting implications for each of the options available to you, so it’s also a good idea to get advice from your accountant and/or financial adviser here.

But once you’ve identified the right structure, having access to legal advice and support to help you with the formation of a company or the preparation of a legally watertight partnership document means you can be confident the business has been properly set up and registered.

What will my employment liability be?

Whilst there are many small companies that are operated by one individual, a great many also have full- and part-time staff – and there’s a good chance those staff are protected by employment legislation for which you, as the buyer, may be responsible.

For example, in many cases employees in the company being acquired may be protected by Transfer of Undertakings (Protection of Employment) Regulations 1981 – more commonly known as TUPE.

These ensure the terms and conditions of those staff members’ employment are preserved when all or part of business or trading organisation are preserved by the new employer – in this case, you.

Your legal team should take a forensic approach to investigating the individual terms and conditions of any existing employees in the business you’re planning to acquire to make sure you understand what your employment liability will be should you go ahead with the acquisition.

How can I be sure that what I’m being told about the business I’m buying is true?

Due diligence doesn’t just relate to the legal liability and risk that’s involved in a commercial acquisition, there’s also financial due diligence to be done. But assuming you’ve had sound advice from a financial professional with the right experience, you’d hope that those two pieces of work will have covered most of the bases.

That said, you can never be entirely sure. If the seller is determined to hide something, even the most detailed investigation of the company’s health may not pick it up.

So, to mitigate for that and any other issues that may come to light once the sale is complete, your solicitor should also ensure that appropriate contractual warranties and indemnities are drawn up to ensure liability for any issue that’s shown to pre-date the purchase doesn’t fall to you.

What’s to stop the seller just setting up a new company and taking the customers or clients from the one I’ve bought?

This is a common potential concern when businesses are bought and sold, and the simplest answer lies in making a restrictive covenant part of any sale. This legally-binding document prevents the seller from setting up a rival business for a defined period of time and within a defined location.

Getting the right detail about the company you’re buying and then putting the right measures in place to mitigate the risks that information then presents is a fundamental part of making sure that when the purchase completes, your business can move forward confidently.

At Carlsons our specialist commercial solicitors can advise and assist you in achieving business growth on your own terms. We can act for both the buyer or the seller, but never for both in the same transaction, so you can be sure you’re always getting the advice and support that’s in your best interests.

If you’re thinking of buying a business, why not call us on 020 8445 3331 to find out how we can work with you to get the outcome that’s in your best interests?