When buying a business what legal issues should I be informed of?

The process of buying a business

When a purchaser acquires another business this will usually be done by purchasing the share capital of the company.

What happens when a purchaser purchases the share capital?

When an individual purchaser acquires a company through the purchase of its share capital both the assets and the liabilities of the company will be acquired. This means that all the issues of the company will be involved. For example a company may make a good profit but there may be certain legal issues which are ongoing. A purchaser of the company will thus take on all of these issues.

What must a purchaser then do before acquiring a business?

Before acquiring a business it is essential to investigate the company which is the target of the purchase, prior to the purchase. This will need to be done in order to understand what the exact state of affairs of the company will be at the time of the purchase of the shares.  Do you need to do due diligence on a company’s data?

How should this investigation be carried out?

This investigation should be carried out by assessing the assets and liabilities of the target company. This should be done in conjunction with the due diligence enquiries which should be undertaken by the accountants working on behalf of the purchaser. The accountants should then set out all the assets and liabilities in a report to the purchaser, prior to purchase. You can also get free company accounts from companies house.

How should this information be presented upon the sale?

Prior to the sale of the company the information gathered by the accountants should be disclosed in a disclosure letter provided alongside any associated documentation for the sale, alongside the warranties stating the current state of the company.

When the company is purchased, control will be taken of the entire company rather than the individual company assets. This may mean that in some cases a tax liability is taken one when the shares are purchased – when this is the case it will become apparent following the checks undertaken by the accountants. Accordingly this may affect the price that the purchaser is willing to pay.

What investigations should be carried out following  the inspection of company property and assets?

Following the inspection of a company’s property and assets the company itself should be investigated. Accordingly enquiries in relation to following issues should be undertaken:

  • Appropriate company searches
  • Inspection of statutory books
  • An investigation of the title to the property and premises
  • An investigation in order to verify the ownership of the target company’s own intellectual property rights
  • An investigation into the nature of any licenses in order for the target company to use any intellectual property rights owned by others
  • An investigation into the terms and conditions in order for the company to use the intellectual property rights owned by others
  • An investigation to verify the financial position of the target company – reference should be made to any overdraft charges and the provision of any guarantees
  • An investigation into any material litigation or product liability exposure
  • In certain circumstances it may be necessary to engage environmental consultants
  • In certain circumstances it may be necessary to engage surveyors
  • In certain circumstances it may be necessary to engage pension advisers and insurance brokers

Furthermore appropriate warranties and indemnities should be obtained in order to ensure for the opportunity for recourse by the purchaser against the vendor. This will be required if the investigations undertaken prior to the sale do not in fact prove to be the case.