In fact, the opposite is more often true. When buying or selling a business or shares in a company, there are many complicated legal procedures which you are likely to be unfamiliar with, particularly if it’s your first time going through such a process. Without sufficient knowledge of how to handle these procedures, there’s a risk of losing both time and money.
At Hilton Smythe, we thought we’d put together a short but comprehensive guide, detailing the benefits of using a solicitor when buying and selling a business.
The benefits of using a solicitor when buying and selling a business.
What can solicitors do?
A list of the legal processes that a business sale may include is:
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- Identifying the assets and liabilities to be sold.
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- Drafting warranties, indemnities, and disclosure.
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- Identifying VAT considerations.
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- Exchanging ongoing supplier and customer contracts.
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- Resolving IT and IP issues such as websites and trademarks.
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- Formalising goodwill protection.
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- Creating apportionments of the price and outgoings.
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- Drafting a release of assets from lenders’ charges.
However, the impact a legal professional can have on a business sale goes further than what’s listed above. In truth, there’s scarcely an element of business sales that isn’t affected by one legal process or another. Whether you’re buying or selling a business, these processes are essential when protecting each party’s interests and ensuring a smooth sale.
Share or Asset Sales
Without the relevant legal support, it’s very possible that a vendor transfers the assets of their business while still being legally bound to the contracts that the business has entered into. For example, this could create a situation where the vendor would end up responsible for paying their suppliers for any goods and services, rather than the new buyer. Alternatively, a buyer could find themselves lacking the very assets that attracted them to the business in the first place.
Confidentiality
It follows that during the sales process, a buyer will have access to a large amount of information about the business, which naturally, a vendor would want to keep confidential. This may include customer lists, the full accounts (that aren’t featured on Companies House), profit margins etc. Therefore, a legally binding confidentiality agreement is a necessary protection should a deal fall through. Otherwise, there is nothing to stop a buyer from using the information that they have learned to leverage an advantage against that business. By the same token, a buy
Heads of terms
A solicitor can also fix the agreed terms in writing, which are referred to as ‘heads of terms.’ A solicitor will review these at the outset, ensuring that they aren’t subjected to later deliberations, which will only delay the sales process, and benefiting both parties.
Due diligence (share purchase)
Once the heads of terms are signed, ‘due diligence’ can begin, a process where the buyer attempts to obtain all necessary information relating to the business. This is a very lengthy and laborious process and trying to deal with this without the assistance of a solicitor is a very risky strategy that could affect both the sale price and present legal ramifications for the business
Approvals
Furthermore, numerous approvals will be required for an asset sale. If there is a lease, the consent of the landlord will be required to assign the lease of the business premises to the buyer. By obtaining the counsel of a solicitor, a vendor will ensure that they haven’t overlooked any important approvals that may complicate the sale down the line. For example, if a vendor is unable to acquire consent to assign the lease of the business premises but sold the business anyway, they may still be liable for paying the rent for the rest of the lease term. Similarly, the necessary approvals are essential so a buyer can take over operations effectively after the purchase has been made.
Warranties and indemnities
Purchase agreements generally include a list of promises that you give called ‘warranties’ and ‘indemnities.’ A buyer typically insists that a vendor gives written assurances that all the information they supply is correct. In addition, the buyer may require an indemnity to cover the costs of certain future liabilities of the business. A solicitor can therefore put a limit on any claims that can be made by the buyer following completion. While protecting a buyer’s interests, warranties and indemnities also provide a legal safeguard should any future disputes occur. Therefore, it is crucial for buyers and sellers to negotiate a good balance of warranties and indemnities depending on the circumstances, thus placating any particular concerns the buyer may have but also protecting the vendor.
Disclosure
A ‘disclosure letter’ can be put together by a solicitor. In regard to a business sale, it’s a crucially important document, qualifying any warranties that the vendor gives during the purchase agreement. Resultantly, the buyer will be unable to take any action against the vendor in relation to the general and specific issues disclosed in the letter.
However, it’s expected that a vendor might not know what needs to be included in the disclosure letter and will, as a result, be left vulnerable. It’s always prudent to consult the help of a solicitor to find any weak points that need to be covered before a sale completes.
