Sale or Purchase of an Existing Business

Legal advice on buying or selling a business

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Buying or selling a business is nearly always more complex in practice than it seems over an initial meeting. Good legal advice at an early stage is always necessary to avoid valuable time and money being lost, either because renegotiation is necessary later down the line, or even worse because a bad deal wasn’t recognised and walked away from near the outset. We have experience of transfers or sales of businesses going back 30 years, and Robert Galloway, our Senior Commercial Solicitor, has advised on transfers of all sizes, from small family businesses to FTSE 100 companies.

Case Study

We handled the purchase of a large food and non-food retail superstore by a well known retailer. We knew that the Buyer intended to employ as many of its staff as possible in place of the Seller’s staff. Our client knew that it would have to pay compensation to certain workers as part of the deal. However, the Buyer did not appreciate that the store cleaners, who were apparently employed by a separate cleaning company, could also be counted as members of staff because their sole job had been to only clean the superstore and no other premises required to be cleaned by the cleaning company. We advised our client early on that this issue might arise and this saved a potentially explosive issue from derailing negotiations at a later stage.

TOGCs

Most business sales are colloquially known as TOGC’s (Transfer of a Business as a Going Concern) and small businesses invariably focus on the property where the business is carried on e.g. a shop or office. Further the majority of business premises are leasehold and therefore apart from any other factors briefly set out below the reader is also asked to consider the section entitled “Assignment of existing commercial lease” in the case of a leasehold.

Apart from the business premises many TOGC’s include all or any the following: apportionment of purchase price; title of business property; debtors and creditors; restrictive covenants; stock-in-trade; employees; accounts and accounting procedures; trade marks; vehicles and equipment; supply contracts; business finance; and tax.

It is strongly advised to appoint an accountant and a surveyor for the majority of TOGC’s. The accountant will consider the previous accounts of the business. The tax previously paid, currently due and payable if the business carries on without great change. The accountant will also advise on the VAT position and, if necessary, will register the business with HM Revenue and Customs.

A surveyor will advise on the state of repair of the property, any patent defects and recommend any remedial or repair work to deal with them and, if leasehold, the level of rent and potential rent increases in the near future.

The purchase price for a TOGC is apportioned, frequently on the advice of a Seller’s accountant between the property, the goodwill, the level of creditors and debtors, and stock-in-trade.

We will advise on the level of debtors (which are likely to include existing customers of the business) and measures necessary for recovery as well as creditors, over and above suppliers, and, if appropriate, service charge liability or potential liability.

We will indicate the nature of any restrictive covenants and, if appropriate, the measures or insurance cover that might be required to deal with them. Restrictive Covenants are obligations not to do a particular act or not to undertake or carry out a particular use e.g. preventing the premises being used as a restaurant or take away food establishment or any unlawful or immoral use. These may be additional to any covenants affecting a tenant in a business lease. It is important to note that such restrictive covenants could impact on the goodwill of the business. The same could be true for a trade mark if the business, or its goodwill, relies on such.

The stock-in-trade could be valued on different bases e.g. at cost value, or sale value or reliant on the figure of an expert valuer jointly appointed by the Seller and Buyer. Further this value can only be determined on completion of the sale as the Buyer will expect the Seller to carry on trading normally to completion, so as not to deplete the goodwill. Therefore the amount of stock, and its control, will have to be considered by the Seller and the Buyer and reflected in the Sale Agreement.

Employees could be a major factor in any TOGC as they could have the protection of numerous statutory rules and regulations generally known, and referred to, as TUPE (Transfer of Undertakings for the Protection of Employees). Indeed certain uninterested persons could be considered as business employees and which are covered by TUPE though these would generally be as part of a larger business transfer. In general terms an employee cannot be dismissed by a Buyer as a result of the business transfer without good reason. In addition any accrued benefits of employment, e.g. holiday pay or entitlement, cannot be lost by the employee and this has to be taken into account in the Sale Agreement.

It will therefore be evident that any proposed transfer of an on-going business can be more complicated than originally envisaged and a Seller or Buyer is strongly advised to instruct a solicitor to handle all necessary documentation and coordinate the efforts of any other appointed professional advisers and at the same relieve the stress on the client and keep them informed at all times. An experienced solicitor should be able to deal with any queries or negotiate specific concerns of the client or note any inconsistencies and report them.

One cannot be sure, at the outset, of the charges of any solicitor as this will primarily depend on the amount of work and time in handling a transaction. However one should be able to obtain a good estimate of the costs and the charging rate of the solicitors’ personnel engaged in addition to any disbursements e.g. search fees, SDLT (Stamp Duty) etc.