Top Ten Tips for Acquiring a Business and Assets

By Will McIntosh

Posted: 22nd July 2014 08:48

You have made the key decision to buy a business.  Your next decision will be whether to proceed by way of an asset purchase or acquiring the shares of the company.  Going down the asset purchase route means you acquire only assets of your choosing, whereas a share purchase involves purchasing the company running the business, with all its assets and liabilities, including tax and employment history.  There are advantages and disadvantages to both, particularly in relation to tax, so take advice before coming to a decision.  If you decide to proceed by way of business acquisition, then read on for our top 110 tips to make the process run smoothly. 
 
1) What do you want to buy? – Identify the essential assets of the business at an early stage.  One of the main benefits of a business and asset purchase, as opposed to a share purchase, is the ability to cherry-pick the assets you need and ensure that certain liabilities are not transferred. 
 
2) Funds – Arrange any necessary funding before making an offer.  In paying the purchase price you might be using cash only, may have agreed to grant the seller shares or loan notes in your company, or perhaps intend to use a mixture of the two.  If the consideration is going to be cash, then funding may be required, for example from a bank or a third party investor.  If you want your offer to be taken seriously then you will need evidence of funds in place. 

3) Heads of Terms – Agree heads of terms, to record what you and the sellerexpect the basic terms of a contract to be, before negotiating the fine detail.  Although not legally binding, they set out in black and white the main commercial points of the deal and can be used in obtaining the finance to fund the acquisition.  Insist on an exclusivity clause which prevents the seller negotiating with any other potential parties for a defined period.
 
4) Consents – Ensure there are no internal barriers.  If you are acting on behalf of a company then ensure that the board will approve the acquisition.  This board meeting should be minuted and signed by the chairman.  Your solicitor will examine your company’s constitutional documents to ascertain if shareholder approval is required.
 
5) Due Diligence – Investigate the target business with the assistance of your advisers.  The purpose of this is for you to obtain as much information as possible about the business and the assets you want to buy.  The seller may have already prepared an information memorandum summarising the key points, but this is unlikely to be sufficient.  Search publicly available information on the business and its assets and engage the seller in discussions as much as possible, whilst your accountant and solicitor carry out financial and legal due diligence.
 
6) Negotiate – Use the information obtained in the diligence process.  You will now have a good idea of the nature and condition of the assets and any liabilities attached to them.  Use this knowledge to negotiate the price; to request indemnities against areas of perceived risk, which offer you protection if certain situations arise; or, in an extreme case, you may want to pull out of the transaction altogether. 
 
7) Third Party Approval – Identify the contracts that the business will require as soon as possible.  Existing contracts such as leases and customer and supplier contracts will not transfer automatically.  These will require to be reviewed by your solicitor to ascertain whether they can be transferred, and approval may be required from the other contracting party.
 
8) Employees – In most cases employees transfer along with a business bought as a going concern and they will do so on their current terms of employment.  It is also important to investigate existing employment liabilities, such as claims and employee benefits, at the due diligence stage.  These benefits and liabilities will also transfer and you need to understand what you are taking on. 
 
9) Licences – Obtain any necessary licences and consents.  What is required will depend on the nature of the business.  For example, if the business discharges effluent, an environmental licence from SEPA may be required.  If a bank is funding the acquisition then they will normally require all licences to be in place at completion, so ensure that you apply for them at an early stage. 
 
10) Restrictive Covenants – Insist on restrictive covenants to protect the business going forward.  The terms of these clauses vary and are often heavily negotiated, but in essence they prevent the seller competing with you for a period after the sale goes through.  Without those protections, the sellers could undermine the value of the business you have acquired by diverting customers or suppliers away from the business, as well as poaching staff. 
 
For more information please contact Will McIntosh at Brodies LLP by phone on +44 (0)131 656 0154 or alternatively via email at william.mcintosh@brodies.com

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