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Buying a small business

The information herein is of a general nature and you should not act or refrain from acting on it without professional advice

Where do I start?

Decide whether you are going to buy the shares in the company or the business itself. Sellers normally want you to buy the shares as that way all the liabilities as well as assets pass. This may be the best option for you though it needs expert advice early on. The sooner you engage an experienced adviser the better.

If I buy the shares do I need to pay a solicitor for a contract?

No. You can just get a share transfer form signed by the seller pay him the price and you will own the company. It is that easy!

Is that a good idea?

Almost certainly no. You should make enquiries about the business which is called "due diligence" and have a contract in which the seller gives you warranties and indemnities.

How do you do due diligence?

Start by getting last 3 years signed accounts to see what money the business is making. If there is anything odd in the accounts such as figures changing significantly from year to year ask why and if need be ask to speak to the accountants. Also ask for the latest management accounts. You want to know if the business has done well in the past but is now starting to nose dive.

Check everything is correct. If the seller tells you not to worry and he will give you replies later become very worried and start to walk away.

If you are taking over a lease check the terms and what you are liable for. This is often overlooked by entrepreneurs and can turn out to be a very expensive headache.

Check employees contracts and that there are no disputes. If there is any intellectual property such as patents check they are valid.

Give careful consideration to any contracts related to the business, as these may prohibit change of control or require consent from the parties. You would not want to take over a business but then find that its largest contract has been breached.

What about warranties?

Insist on the seller giving a warranty that the past 3 years accounts show the true trading position. Make sure all clients are passed to you and that the seller will not take clients away with him. Think about what could go wrong and try to get the seller to give a warranty for as much as possible. Sellers will be reluctant to do this and most warranties are limited in time. This is reasonable and you will have a short time after taking over to make a claim.

Think also about the solvency of your seller. There is no point having watertight warranties and then discovering when you make a claim that your seller has no money to pay you. If possible have some of the sale money held back by a solicitor in escrow to pay out on any claim.

Can I have any protection?

What is to stop the seller from selling you the business and the setting up a competing business slightly further down the road?

Push for restrictions which prevent the seller from affecting the business once you have bought it. These often take the form of non – compete, non – solicitation and non – dealing provisions, although these should be careful drafted by a solicitor to make them more likely to be enforceable.

How can we help?

We have a specialist team dealing with company and business acquisitions, who work on these transactions on a daily basis. We know what to look for during due diligence and how to negotiate the contract to protect your interests. Our advice is given in plain English and from a commercial prospect and we make buying a company or business as straightforward and stress free as possible.

David Anderson