You’ve found a lovely country pub or perhaps a vibrant city bar or café, you’ve been to visit it, spoken with the seller and made your offer, which, happily, has been accepted. Now what? Now is the time to speak with a solicitor. There are a number of considerations during transactions like these and it’s important that you receive the right advice.
Heads of Terms
The agent who has marketed the business should draw up a document, known as Heads of Terms, setting out the main terms agreed between you and the seller. If there is no agent then you should make a list of any particular arrangements you have made with the seller, and also detail any special requests you have for the transaction. Most solicitors will be able to draw up a basic set of Heads of Terms for you and liaise with the seller’s representative to reach an agreed starting point for the transaction. Remember, Heads of Terms are generally not legally binding, but they are an extremely helpful starting and reference point for everyone involved in the transaction.
This is an information gathering exercise that your solicitor will carry out on your behalf. It is a way for you and your advisers to assess the legal, financial and commercial status of the business you wish to purchase. You should be able to gauge any issues or potential issues that you could either ask the seller to rectify or provide a warranty for (see below). Information provided by the seller should include details of any property, fixtures and fittings, any business contracts (including any informal arrangements with suppliers), premises licence details, advance bookings, financial detail (i.e. creditors and debtors), staff, insurance and financial matters.
Assuming the transaction is an asset sale / asset purchase (where you essentially acquire the trading business and its assets (e.g. the property, employees, fixtures & fittings etc), but not the liabilities of the business nor the selling company itself), this contract is normally referred to as an Asset Purchase Agreement or an Asset Sale Agreement. It will document the agreed terms, listing exactly what is or is not included within the sale, as well as dealing with employment matters, the property, warranties, obligations of you and the seller and general governing provisions. This document is generally longer than a commercial property contract and can be heavily negotiated.
It may also be necessary to include additional provisions in the agreement, based on the due diligence exercise, so that matters are dealt with before or within a certain timeframe following completion, documents are handed over to enable the transfer of a premises licence, business contracts, employee information and so on.
Warranties are contractual statements set out in the agreement as to the condition of the business (including the assets) being acquired. As a buyer, it is important to have warranties:
There is a “caveat emptor” or “buyer beware” principle which underlies English contract law and which applies to an asset purchase. This means that your agreement with the seller should specifically provide for any protections you may require. There are some “usual” warranties that a seller’s solicitor will expect your solicitor to ask for, but it may be that additional ones are required as a result of the due diligence exercise.
It is important that as part of the due diligence process, information about employees, their terms of employment with the business and the history of their employment is obtained from the seller. You need to know, from a financial point, if there is any outstanding pay, holiday entitlement, benefits, bonuses etc that you will be expected to meet from completion.
As a buyer, you may be prevented from taking on a business without also taking on the existing employees (on their existing terms of employment). Existing employees may well have the benefit of the Transfer of Undertakings (Protection of Employment) Regulations or “TUPE” which provide protection for employees when a business they work for changes ownership. There are also certain obligations placed on both you and a seller to ensure that employees receive the correct information regarding the transfer of the business. You should ensure that you obtain appropriate employment law advice from the start of the transaction.
There are a number of points to consider under this heading for an asset transaction. How are you funding the purchase? If this is a cash purchase, then your solicitor should ask to see proof of the funds you hold early on in the transaction. If you are purchasing with the assistance of a lender then your solicitor will need to know who this is and who is acting for them, together with a list of their requirements.
Cash purchasers can often drive a transaction themselves; they are not answerable to a bank and therefore can, if they wish, take a more lenient view on matters arising during the transaction than a purchaser who is buying with the assistance of a mortgage. If a lender is involved, it is important that they or their solicitor is kept informed during the transaction and provided with all and any necessary information to be satisfied that the funds should be released to allow the purchase to complete. It’s great to have an offer of a loan from a bank, but this will generally be subject to a number of conditions and stipulations which you and your solicitor, or sometimes even your seller, will have to meet.
It is also important that you are correctly advised in terms of the financial side of the transaction. This would include the purchase price (and the apportionment of it between the different assets of the business), any apportionments to be paid by you or to you on completion, your VAT status and that of the seller, and of course, the actual trading / profit levels of the business. It is important to instruct an accountant with experience of asset transactions at the start of the matter.
The above points are by no means the only matters to consider in an asset purchase, but they are some of the most important ones. At Hay & Kilner we have the experience and expertise to guide you through your matter, assisting at each step. We can also put you in contact with other professionals to assist with matters like these to ensure you receive the best possible outcome.
For more information on how we can help, please get in touch with Jennifer Boynton.