Buying or selling a business can be confusing.
There’s lots of complicated words that you may never have heard of. Here’s a list of some of the terms that you may come across when you’re buying a business.
A method used for attributing costs to particular aspects of the sale price. For example the division of goodwill, equipment, fixtures and fittings, etc.
A confidentiality agreement is a legally binding document that prevents the parties from disclosing any information covered by the agreement, it can also be called an NDA (non-disclosure agreement).
DEED OF SURRENDER
Deed of surrender is a legal document which transfers property ownership for a certain period of time, provided that certain conditions are met.
A disclosure letter is sent by the seller of a business to the person buying the business to disclose any matters which qualify or contradict the warranties outlined in the sale and purchase agreement.
Due diligence is an audit of the business, it looks into the performance of the business and is designed to check the worthiness of the investment. The audit will look into the financials, debts, ownership, staff and premises.
A handover period is a period of time in which the seller remains at the business after the sale to ensure a smooth transfer process. During this time the seller will be able to help the new owner settle in, this could include assist in running the business, explain the business and the systems in place and introducing employees, suppliers and customers to the new owner.
HEADS OF AGREEMENT/HEADS OF TERMS
Heads of agreement or heads of terms outlines the details that have been agreed by the seller and the buyer of a company.
A intangible asset is a non-physical asset of the business (something you cannot touch) for example copyright, reputation and knowledge.
LICENCE TO ASSIGN
A licence to assign is given to by a landlord to his tenant giving the tenant the permission to transfer to lease to another tenant. The transfer of a commercial lease can only happen with the landlord’s formal consent.
A memorandum is a document that details the business, this includes it’s history, products, services, competitors and financial statements. This can also be used to plan for the future of the business.
SAV is short for stock at valuation, this is the value of fixed assets at the time of valuation.
Statutory books are documents that a business must legally keep on record. When a business is sold, this document will be needed during the business transaction to be handed over to the new owners.
Statutory books may include:
- Register of shareholders with respective shareholdings
- Register or directors and secretaries
- Memorandum and articles of association
- Company minute book
- Certificate of incorporation.
Tax warranties relates to the tax position of a company. They are used to protect the buyer from tax liabilities prior to the time they own the business.
If a tax investigation is made after the business sale transaction and shows unpaid tax/fines, these will be recovered from the seller.
Tax warranties may be:
- All tax returns have been filed and are correct and complete.
- All tax bills have been paid on time and in full.
- No special correspondence has been received from the tax office.
Warranties are statements made about a business that are claimed to be true and correct. Many warranties are standard clauses in business sale contracts, however some may be added by the buyer’s solicitor to protect the buyer.
Warranties may be:
- The seller is not aware of any reason as to why the company may have a drop in profitability.
- The seller is not aware of any complaint/issue that may give rise to a claim by any employee of the business.
Warranties will usually be produced by a buyer’s solicitors prompted by things that may have been uncovered during the due diligence process. The seller will have the opportunity to qualify the warranties via a disclosure letter, where they will explain any expectations that may adjust the warranty statements.