5 Legal Tips on Buying and Selling a Business

THINKING OF BUYING OR SELLING A BUSINES? READ THIS FIRST!

Whether you are buying or selling a business there is a certain amount of excitement and anticipation. You will either be imagining how you will run the business and how you will improve it (the buyer) or thinking about your next role/project or retiring to the Bahamas (the seller).

Unfortunately, this can mean that whether you’re buying or selling you can miss some essential issues which will cause you lots of         big headaches in the future. I’ve put together my top 5 tips for sellers and top 5 for buyers based on my 28 years advising business owners on this topic.

1          What do you want to achieve?

It’s never as simple as

– selling a business or

– buying a business

because you need to examine your motives for wanting to do this, and think about how things might look when the transaction is over – the end vision. For example:-

Sellers

• do you want to walk away after handing over the keys/website and cease to have any interest in the business or have a role in the business after it’s sold?
• do you want to retain some shares if the business is a company and you are not getting full market value for it at the point of sale?

Buyers

• do you want total control from the beginning or might it be a good idea to employ the buyer for a fixed/limited time to ensure a smooth handover?
• Is it just part of the business you want? For example, are you interested in taking the designs for the seller’s products but are not keen on the staff or leases?

Once you’re sure what you want to achieve you can enter into negotiations with those specific goals in mind. If the buyer wants the seller to retain a role for 12 months after sale but the seller is emigrating that will be a problem. However, if you have clear goals in mind you may find that the solution that works best for both of you is not what you envisaged to start with. Staggered handovers with the outgoing owners spending less and less time in the business often works a lot better than a full 12 month full day attendance.

2          Is the timing right?

With anything, timing is all important so you need to think about this, not just from the perspective of business continuity but also because of tax issues. It’s always worth talking to your accountant before getting too sold on the deal. This can ensure that, for example, choosing a different date or delaying purchase or sale for a short while may mean that you can take advantage of tax savings.

3          Are you ready?

You will need to consider such issues as

Sellers 

• is the business “ready” to be sold?
• have you covered the relevant issues and protected what you’re selling? For example, trademarks, registered designs, other intellectual property. Proper registration and protection is more attractive as a proposition and will yield a better price and so it’s time to put your house in order before you start talking price as you will be operating from a much weaker position without everything protected and ready to sell.

Buyers

• do you have funding in place to need any unforeseen expense?
• Do you have the necessary time and other resources?

3          Find out exactly who you’re dealing with – due diligence

It’s all too easy to get caught up in the flurry of activity and miss the first and vital step of finding out who the other party is within the sale. For example:-

Sellers

• what is the buyer’s background/track record? This is vital if, for example, you’re retaining a role or shares.
• What is the buyer’s financial situation? There may be little point in looking at, for example, stage payments when the buyer is unlikely to have sufficient funds. Does the buyer have a track record littered with business failures? Not always a deal breaker on sale but should affect your post sale involvement.

Buyers

• what is the business really like? Examine finances, talk to employees and “get under the skin” of the business to find out exactly how it works.
• If you will be carrying on an existing business do the people/ equipment/ products/ services fit in with your strategic plans or will making changes mean you lose the customer base you’re buying into?

4          Protect yourself if things don’t proceed

So, following on from my point about due diligence, any prudent buyer/seller will want to know all about the other party and their business. This will mean disclosing a lot of vital information, including important trade secrets. If the transaction doesn’t work out then you want to ensure that these are protected and the only effective way to do this is by having a non-disclosure agreement (an NDA) BEFORE you start negotiations.

5          Talk, but also listen

You will have your own ideas for how something is going to happen but very often taking time out to listen to the other party involved will yield some surprising results. For example, a business owner who is retiring may be aware of a market opening that a buyer hasn’t considered.

6          Get it in writing

The agreement for the sale/purchase is vital because it helps avoid any misunderstandings. I’m certainly not suggesting that anyone would want to enter into a transaction deliberately wanting to mislead the other party but we all have different views/concepts. For example, my idea of a “great coffee” is probably very different to yours.

Having an agreement will also help you concentrate on the smaller issues which can get forgotten and so avoid the “but I though you were going to ….:. set of excuses for things not done or included.

Even using a template agreement can be a good idea on small sub £3K purchase but I do have to say, if you are investing (or have already invested) a lot of money, time and effort why wouldn’t you want to have it securely written up?  That if something goes wrong you know you’re secure, you will always get much more than a legal agreement from us and we have a proven track record in saving clients’ money and negotiating better deals. Ask yourself, “if the other party was run over by a bus tomorrow would anyone not involved in the transaction clearly see who is responsible for what and what will happen next?”

My final tip, enjoy the experience and the process. Whether you’re getting involved in a venture or saying goodbye to an existing one you’re entering a new phase in your life so do take the time to enjoy it.

Steph Barber October 2014