How to buy a business – the legal process

Wednesday, October 9th, 2019

This article sets out, in basic terms, the legal steps required when you buy a business.

1. Heads of Terms

When looking to buy a business, the first step is to agree the commercial terms of the deal, the most important being the purchase price and agreeing how this will be paid. Although non-binding (usually), heads of terms are important as they create a moral commitment between the parties which can be difficult to deviate from down the line. For this reason, we would always recommend buyers take professional advice before agreeing heads of terms for buying a business from a seller.

2. Due Diligence

Once heads of terms are agreed, the buyer’s solicitor will carry out a legal due diligence review of the target business. The buyer’s solicitor will make an information request to the seller’s solicitor, who, together with their client, will provide the requested information for the buyer’s solicitor to review.

The buyer’s solicitor will require responses from the seller on a wide range of issues in relation to the target business, including corporate structure, finance arrangements, intellectual property rights, litigation history, employee information and regulatory compliance. The buyer’s information request will often be tailored to focus on specific areas based on the type of business that is being acquired.

3. Transaction Documents

Normally at the same time as issuing their information request, the buyer’s solicitor will circulate to all parties a documents list, which lists the documents required to complete the purchase. The documents list will normally describe each document, its proposed signatories, which solicitor will prepare it and its current status (to be updated as the transaction progresses).

The average business purchase will require around 30-40 signed documents to complete, most of which will be prepared by the buyer’s solicitor and signed by the seller. Often the longest and most heavily negotiated document is the sale contract, which sets out the terms of the purchase and will include a suite of warranties from the seller to the buyer as to the state of the target business. Aside from the sale contract, other key documents to be agreed between the parties include the disclosure letter, stock transfer forms, corporate authorisations, powers of attorney, waivers of claims and settlement agreements.

4. Completion

When the buyer and their advisers are satisfied with the due diligence exercise and the transaction documents are agreed between the parties, the parties can exchange signed counterparts of the transaction documents and either move to completion straight away or set a completion date. The latter method is normally adopted if completion is conditional on something (such as the approval of a regulatory body).

5. Post-completion

Following completion, in the case of a share purchase, the buyer should instruct their advisers to update the target business’ Companies House file and settle the stamp duty payable on the share transfer (0.5% of the purchase price).

If the buyer has borrowed money to finance the purchase, they should also instruct their advisers to make any filings at Companies House and HM Land Registry that their lender may require.

 

If you are looking to buy a business and wish to discuss matters in greater detail, please contact one of our commercial solicitors on 0207 228 0017 or info@hanne.co.uk
This article does not constitute legal or other professional advice or a professional opinion of any kind nor does it give rise to a solicitor/client relationship. If you require specific legal advice on the matters contemplated by this article, please contact a member of our Commercial Team.

 

Alex O’Leary is a solicitor in the Corporate & Commercial Team at Hanne & Co. LLP

Alex O'Leary, Solicitor at Hanne & Co, experienced in helping clients buy a business