This idea is held among people who are looking to expedite a range of transactions, whether in the realm of trade and commerce, or wholesale and stockbroking. After all, the most important participants in a sale should always be the vendor and buyer, right?
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:
- Identifying the assets and liabilities to be sold.
- Drafting warranties, indemnities, and disclosure.
- Identifying VAT considerations.
- Exchanging ongoing supplier and customer contracts.
- Resolving IT and IP issues such as websites and trademarks.
- Formalising goodwill protection.
- Creating apportionments of the price and outgoings.
- 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.
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 buyer is protected in the very unlikely event that any accusations are made against them.
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
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.
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.
It is beneficial for a buyer to protect their newly acquired business with the necessary legal restrictions, so as to avoid any conflicts of interest when the business is sold. For instance, these restrictions may include clauses that impose a non-solicitation of customers, a non-solicitation of employees and a written agreement that the vendor will not compete with the business in any future endeavours. It’s critical that during a business sale, a buyer is given what they’ve paid for in terms of intangible assets, which includes a business’ reputation and ability to compete in the marketplace as demonstrated in its recent activity. To prevent a buyer from taking on a business that is able to perform as it had done prior to the sale, leaves the vendor open to be taken to court on grounds of legal misconduct.
By the same token, a solicitor can help a vendor to ensure that any restrictions are reasonable, and not overly obstructive should the vendor wish to work in a related business in the future. For example, a vulnerable vendor may be faced with a court injunction that prevents them from working for another company, or even may leave them unable to earn a salary.
Many people believe that selling a business is an over-night matter. Although business sales often have much in common with the property market, it’s a misnomer to think that a business can exchange hands as quickly as a house, particularly during a seller’s market. Rather, in its very nature, a business sale is often a long and legally complex affair.
We find that the most satisfied vendors and buyers are often those who can distance themselves from the idea of a quick transaction, and who are prepared to devote ample time and resources to proper legal proceedings. And by investing in this effort, they often find themselves saving time and money in the long run.