Every business sale really is different with a combination of factors and issues that need to be dealt with which are unique to your business. Having said that though, there are similar aspects which are common to most business sales. We are setting out in this article some of the key legal matters that are relevant to the majority of business sales.
Due Diligence
In the majority of cases most of this will have been done before solicitors are involved in the sale of your business, but this has implications for the legal process. Due diligence means the checks that a buyer will do to assess the value and potential of your business. It may involve checking the condition of physical assets, looking at your business accounts and making sure that there is nothing which will adversely affect the value of goodwill. More detailed due diligence will be carried out on certain issues by the buyer's solicitor in due course. These will usually include such things as raising lists of detailed questions for you to give information on and carrying out property searches.
Heads of Terms (HOTs)
Heads of terms is a document which sets out a list of the main key terms and information concerning the agreement. The heads of terms are often produced by your business transfer agent if there is one. Sometimes, especially in more complex or high value business transactions, the heads of terms are negotiated and prepared by solicitors. But in the vast majority of cases your business transfer agent will speak to you and your buyer, ascertain the outline of what you both want to agree to and draw up the key terms.
Heads of terms are not legally binding. Either party is free to pull out or renegotiate at any time. However, parties usually consider them to be morally binding and so will not be happy about renegotiating once you've "shaken hands" on a deal. It is always a good idea to speak to a solicitor about heads of terms before you agree to them, even though it is an agreement in principle only and is always "subject to contract".
The heads of terms will list such matters as the details of the parties and their solicitors. They will list the sale price; what assets are being sold and what assets might be being excluded. There will usually be a proposed completion date; outline of employees; stock; details of the lease and the Landlord's details and any other particular features the parties might have agreed to.
Instructing Your Solicitor
It is usually after the heads of terms that solicitors are given formal instructions to sort out the legal process. As we say above, it is always a good idea to get some legal advice before you "shake on" the heads of terms. The heads of terms, once agreed, are circulated to the solicitors and they then use this as a basic guide to help them with the contract and sorting out all the other things involved.
Different solicitors deal with things in different ways, at NA Legal we would at this point send you a questionnaire and a list of documents and information we need from you. It is then your job to get all of this information to us as quickly as possible. Based on this information we then prepare a legal sale pack to send to your buyer's solicitor.
The Contract
The seller's solicitor prepares the draft contract. Even in the sale of straight forward business sales, the contract will be quite a complex legal document. Because every business sale will be different, every business sale contract will be different. There are several very important purposes of having a solicitor draw up a property bespoke written contract. Having a written contract fully and accurately explains what is happening, what is included in the sale and, equally importantly, what is excluded. The contract will fully define the legal rights and obligations of both parties. Where there is an agreement but the rights and obligations are not properly legally defined, then that is where disputes arise and any agreement may turn out to be worthless. Also very importantly, the contract defines the change in legal ownership of assets.
The contract has to be right, otherwise you may find even after you've received money from the sale, you face a claim from your buyer for a refund or for compensation. Such a situation could easily ruin your life for years, so its obviously a very good idea to have a solicitor with the expertise to draw up a sale contract which is watertight and covers all the bases for you.
Your Business Premises
In most cases the business premises will be leased and this will almost certainly mean that the Landlord has to give formal consent to a transfer of the lease and will add all manner of conditions. A common condition is that you, the seller, as the outgoing tenant must stand as guarantor until the end of the lease. This may sound cumbersome and unfair, but most modern leases give the Landlord the right to do this. It would always be a good idea for you to take legal advice on whether you are obliged to stand as guarantor before you dive into a sale. Even if the lease does say that you are to stand as guarantor, there might be scope to negotiate out of it and there are ways you can make sure that you are covered in the event of the new tenant defaulting. Where you have to stand as guarantor, you will sign what is called an "authorised guarantee agreement" (AGA) with the Landlord.
When a lease is being sold as part of the business, the Landlord will require both seller and buyer to sign up to a separate legal document called the "licence to assign". The licence to assign is effectively a separate three way contract which sets out the Landlord's conditions for formal legal consent and sets out the obligations of each party. Such obligations may last well into the future and so its important to negotiate a document which is fair to you.
If you are selling a limited company, the situation is probably a bit more straight forward providing the lease is in the name of the limited company. There should be no need for a licence to assign or an AGA, though there are exceptions to this depending on the exact wording of your lease.
Although most business transfers will involve leasehold property, some business premises are freehold. This means that the freehold title must be legally transferred to the buyer as part of the sale. Any mortgages or other debts charged against the leasehold title will have to be paid off. Your buyer is likely to be taking out their own mortgage and their mortgage provider might have their own conditions that could add extra complexity to the situation.
Business Goodwill
In most business transfers, this will be the most valuable part of the business. Goodwill effectively means the future profitability of the business. It is based on the brand, good name or customer base you have built up. It is often described as "intangible" becuase goodwill is not a physical asset. Although the contract deals with a transfer of goodwill it is normal for there to be a separate deed which formally assigns ownership of the goodwill
Enquiries, Searches and Inspections
It all depends on the particular case, but it is normal for the buyer's solicitors to make enquiries and carry out searches. Enquiries will involve a mixture of standard commercial property enquirues (CPSEs) and enquiries specific to your business. CPSE enquiries include dozens of sometimes highly technical questions about your business premises. The enquiries specific to your business will be more focused on specific aspects of your business that your buyer's solicitors want to know about before committing to the business transfer. This will all form a part of the due diligence process that we mentioned above.
Formal legal searches are likely to be carried out by your buyer's solicitor. This will normally include a local authority search and a water and drainage search as a minimum. The local authority search reveals all sorts of information on your business premises and the area they are situated in. It tells your buyer about planning permission, building regulations, conservation areas, the local roads and compulsory purchaes to name just a few matters.
Sometimes your buyer might want to get a professional in to undertake inspections. The most common type of inspection would be for a surveyor to have a look at the premises and assess the state of repair and condition. Electricians, gas engineers and asbestors surveyors might also be sent to inspect. All of these searches, enquiries and inspections are likely to lead to further issues that your solicitor needs to deal with.
Employees
You may of heard of the TUPE Regulations. What these regulations say is that where a business is transferred as a going concern, in most cases the contracts of employment will automatically transfer to the new owner of the business from the date the purchase goes through. There is no need for the new owner to enter into new contracts of employment and the new owner automatically inherits all of the rights and obligations which you the seller were subject to.
There is a duty on you to inform your employees before the business sale goes through. Where you have fewer than 10 employees this can be done informally, but there are rules to be followed where there are 10 or more employees.
There may be some cases where the TUPE Regulations don't apply and in these situations the contracts of employment will need to be legally transferred in a different way. Because the buyer of your business will be taking on your employees your solicitor will need to provide a lot of information about them. The business sale contract will also need to contain warranties where you declare that there are no disputes with your employees and no potential employment tribunal claims; expected resignations or disciplinary issues etc.
Contracts, Book Debts and Liabilities
Even a very small business will have a complex collection of contracts with customers or suppliers. This could be anything from a contract for the hire of a fridge to a commercial contract with clients worth a large amount of money each year. These contracts all have to be identified and disclosed to the buyer of your business. Some contracts can be just cancelled and new ones taken up by your buyer. Some may have to be formally transferred to the buyer, sometimes through a process known as novation. Novations can add complexity as they are three party contracts which will require the agreement of a third party.
The sale of business contract will need to deal with book debts (money owed to the business by its customers) and liabilities. Normally the book debts and liabilities remain with you the seller, but this will be a matter of negotiation in each case.
Licences and Permits
Some business need licences or official permission to be able to trade. Businesses licensed to sell alcohol, book makers and regulated professions are but a few examples. In each case, there will need to be some process for these licences and permits to be either transferred or the buyer obtain a new licence to coincide with the transfer of everything else.
Completion
"Completion" is the legal term meaning when the sale and purchase go through and the business transfers in law to the buyer. You and your buyer will agree when the completion date is. On the day of your completion the solicitors will attend to the final legal formalities. They usually do this over the phone with the final completed paperwork being exchanged afterwards. This part of the process will include writing in the dates and authorising a final sign off on all the different legal documents involved. The full range of documents signed off at completion will usually include : sale of business contract; deed of assignment of goodwill; licence to assign; authorised guarantee agreement; any novations; and transfer deeds for legal transfer of freehold or leasehold property.
Further Information or If You Need a Solicitor for the Sale of Your Business
Please contact us today with any enquiries you have; for more information about the process or if you need a solicitor for selling your business.
You can contact us by email, by completing the contact form on this webpage or by phoning us completely free of charge and without obligation on 0800 1777 522.