YOUR GUIDE TO BUYING A SMALL BUSINESS.

Transcription

1 YOUR GUIDE TO BUYING A SMALL BUSINESS. Many people decide to purchase a small business as a going concern, be it a pub, bed and breakfast, café, or something a little more unique. You might already have a lot of experience in how to run the particular business (or, at the very least, bags of enthusiasm) but the legal process to acquire that business can sometimes be a little daunting. We understand this is an exciting time but it is vital that you consider all of the financial and practical implications before you commit, as getting it wrong will have an impact on you personally. This note is intended as a general overview of the legal process in buying a small business and considers some of the main points your solicitor will discuss with you. A good solicitor will not only guide you through the various procedural steps but will work with you to understand what is important to you and your business and tailor their advice to your needs.

2 INITIAL INSTRUCTIONS TO YOUR SOLICITOR It is important that you feel comfortable talking through any concerns or queries you have with your solicitor and it advisable to speak to them about these before you make a commitment to proceed. At Crombie Wilkinson we are happy to have an initial discussion without any obligation for you to instruct us to act on your behalf. Once you have instructed a solicitor to act on your behalf in buying a small business, there are certain procedures they will need to comply with to open their file and act on your behalf. These include: You supplying evidence of your identity (to comply with money laundering regulations) and confirming whether you are buying the business in your individual name, a company name or through another vehicle (such as a partnership); Your confirmation as to where the funds for your purchase will be coming from (e.g. savings, from a family member or a loan from a bank); Providing monies on account to cover the cost of third party charges we may need to incur on your behalf. These are known as disbursements. Your solicitor will write to you outlining their terms and conditions of business, including details as to their charges. In small business transactions an estimate of costs rather than a fixed quote is usually supplied and the solicitor will normally charge for their time spent by reference to an hourly charging rate. In certain circumstances your solicitor may be willing to provide a fixed quote for their costs, so it is always worth discussing this with them first. At this point, your solicitor will take some detailed instructions from you and make contact with the solicitor acting for the seller. If there is an agent involved, they will collate some of this information in a document known as Heads of Terms. This will assist your solicitor, and the seller s solicitor, when preparing a first draft of the agreement.

3 DUE DILIGENCE Due diligence is the process of finding out key information about the business you are buying. This exercise will help you to determine whether the business you agreed to buy is as you expected, and, perhaps more fundamentally, is worth the price you agreed to pay for it. Due diligence can be an extensive exercise but your solicitor should work with you to find out what you already know about the business and what your other advisers (accountants, tax advisers etc) will be assessing, to avoid duplicating any enquiries. Your solicitor will prepare a due diligence questionnaire to send to the seller s solicitor, who will then work through the questions with the seller. The answers provided will determine whether further enquiries need to be raised. Most small business transactions we see involve the transfer (or a lease) of a property as the main part of the transaction. The property will normally be the business s biggest asset and your solicitor will investigate the seller s title to the property and raise enquiries. More information about the extent of these investigations can be found in our guides Buying or Leasing a Commercial Property and Guide to Entering into a Commercial Lease.

4 NEGOTIATING THE CONTRACTUAL DOCUMENTS While the information from the due diligence exercise is being collated, your solicitor will be negotiating an agreement (or contract) to record the terms of what has been agreed between the parties. The agreement can be quite lengthy and covers a number of different areas, including the assets of the business which will be transferred to you, regulatory requirements, warranties about the business, restrictions on the seller after completion, indemnities and limitations of liability. We have explained some of common areas covered in an asset pur- PROPERTY Most small businesses require some form of property from which to operate. It is likely that you will either be buying the freehold of a property from the seller, or otherwise be taking a new lease from a landlord, or, more commonly, the transfer of the remainder of the term of an existing lease (known as an assignment). The agreement will contain a section about the documentation necessary to transfer the interest in the property to you and your solicitor will be able to negotiate the contract terms and incorporate conditions which the Seller must fulfil, as appropriate. More information on the property implications of a small business transaction are dealt with in our guides Buying or Leasing a Commercial Property and Guide to Entering into a Commercial Lease.

5 RENT DEPOSIT an initial sum paid to the Landlord at the beginning of the lease to be held in the Landlord s bank (usually in a separate designated account) as security for compliance with the lease obligations. If for example you fail to pay the rent or keep the property in repair the Landlord will be entitled to offset these costs against the deposit. SDLT Stamp Duty Land Tax can be payable on a new lease even though you are not buying the property. It is calculated by reference to the length of the lease and the rent (plus any VAT payable on the rent) and a formula applied. If the lease is for 7 years or more you will need to file an SDLT return with the Inland Revenue even if no actual SDLT is payable. There is no such thing as a "standard" lease"! Given the complexities of leases with plenty of pitfalls to watch out for, it is a good idea to seek specialist legal advice. Crombie Wilkinson Solicitors are experienced in dealing with lease arrangements and can identify potential problems at the outset and explain and guide you through the obligations so that you are comfortable before you make a legally binding commitment to proceed. We can also help to try and negotiate lease terms on your behalf should anything become unclear. This document does not constitute legal advice in its own right. Always seek personal advice direct from a Solicitor before you take any action. For further information contact: Andrew Darnton at Crombie Wilkinson Solicitors E Mail: a.darnton@crombiewilkinson.co.uk 19 Clifford Street Forsyth House Market Place 6 Park Street York YO1 9RJ Malton YO17 7LR Selby YO8 4PW Tel: Tel: Tel: