Preliminary Considerations When Buying or Selling a Business
26 April 2021 by Andreea Brindas
We Can Provide Legal Advice for Commercial Transactions
Selling or purchasing a business in Essex can be a complicated process, especially if you aren’t familiar with all the steps. Getting advice from professionals like accountants and legal experts will allow you to make a well-informed decision. The trained legal experts at Fisher Jones Greenwood can assist you with the legal matters relating to such transactions. We’re here to answer your questions and point out the crucial things you need to consider before entering into a contract to buy or sell a business. Please reach out to us for additional guidance.
Buying: What Your Preliminary Offer Should Include
If you’re interested in buying a business, there is a formal process that should be followed. Though many commercial transactions begin with casual conversations about the business and how it operates, all purchase offers should be made in writing. Any initial verbal purchase offer should be followed by a formal letter that includes the main details and prominently states that the offer is “subject to contract.” This essentially means that the letter is not legally binding. Your preliminary offer should include details about the terms of vendor handover and premises takeover, such as:
- What you want to buy, i.e., the business or its assets (please note our comments below regarding the structure of the deal)
- The offer price and payment terms
- The main information you need before making a firm offer, i.e., whether leases, licenses, and client contracts are transferable (if applicable), liabilities for employees, etc.
Negotiation Points: Things to Consider
When purchasing a business, you may negotiate with the seller directly. Obviously, one of the most important things to consider as you enter negotiations is the price. Many things come into play here, including the actual value of the business and what you’re willing to pay for it, as these two amounts may not be the same. You’ll want to get a preliminary valuation of the business to get an idea of what the company is worth. We highly suggest that you have an independent accountant complete this valuation rather than the business’s accountant to ensure you get the most accurate estimate.
In addition to price, there are also some other things you’ll want to keep in mind during negotiations, including:
- The Structure of the Deal: Are you planning for this to be an asset or share sale? Whether you intend to buy the business assets or shares in the business will affect how you want to negotiate the terms of the agreement.
- Payment Method: What type of payment is the seller willing to accept? They may have a preference and want payment for everything in cash or be willing to accept offers where you spread out the cost over a period of time, also known as a “deferred consideration.” You should discuss this with your accountant to see what you can afford and any tax implications you’ll face.
- Conditions: Are there any conditions that need to be fulfilled before you agree to purchase the business? For example, there may be consents that need to be obtained, licenses, contracts that need to be fulfilled, etc.
- Other Considerations: There are other things you’ll want to consider before purchasing a business, such as whether the seller intends to resign from the company or will continue as an employee or consultant. You’ll also want to discuss timelines and when you want to ideally have the sale finalised. Finally, you’ll want to discuss the property itself, does the business own the property, or is it leased?
Selling: What Do You Wish to Sell?
If you are on the selling end of a business transaction, things will look a little different. The first consideration you’ll need to make is what exactly you intend to sell. Are you selling the business as a whole, including all assets, or are you just selling shares? We’ll help you understand the difference between these two types of sales:
- Shares: You can choose to sell some or all the shares of your company. Depending on the number sold and the agreement with the buyer, this will likely give them some power in business decisions. The company will retain ownership of any assets that were in its name at the time of the transaction- this is because the buyer is simply acquiring shares in the company rather than individual assets.
- Assets: When a company and all its assets are sold, the buyer purchases everything the company owns. This usually excludes liabilities unless otherwise agreed between the parties. However, you can also choose to sell some of your business’ assets while still retaining ownership of the company. It’s essential to be clear about what you’re selling.
Completion Accounts: What to Know
If a buyer intends to acquire shares in your business, you will need to negotiate whether the proposed offer is to be on a cash-free/debt-free basis. If so, a set of accounts may need to be prepared on completion, known as “completion accounts,” to determine any adjustment in the price which may be necessary. An accountant will be able to offer further advice on this issue and help you determine the best way to proceed.
Contact Us Today
If you have additional questions about the sale or purchase of a business, the Corporate and Commercial team of Fisher Jones Greenwood would be happy to help you. Please reach out to us today to discuss any concerns you have or to set up an appointment to speak with one of our professionals, call 01206 700113, or by email at [email protected].