It should be stressed at the outset that this Article only looks at the legal aspects of buying a "business" rather than buying a "company" by the purchase of some or all of the Issued Share Capital in respect of which you acquire "warts and all".

The starting point with a view to buying a business is to agree "Heads of Terms" or "Heads of Agreement" which ostensibly are one and the same thing. These merely set out the principle points of the Agreement, perhaps on one sheet of paper and numbered from e.g. 1 to 10. These set out the parties, the price, the consideration and any other principle points. It is better to agree Heads of Terms at the outset because if Heads of Terms cannot be agreed, it would be a waste of time and money instructing lawyers to try and prepare a Sale and Purchase Agreement in the absence of Agreement.

The next stage of the Acquisition is what is known as "Due Diligence". This is achieved in a number of ways by the raising of Pre-contract Enquiries and carefully reviewing the Replies received. One must look carefully at the nature and content of the Replies as they are likely to be carefully qualified. The Pre-contract Enquiries and Replies are likely to be supplemented by inspection of the Company's Books and Records, for the Purchaser to satisfy himself as to precisely what he is buying. In this regard, a Seller may very well ask the Purchaser to enter into a Confidentiality Agreement before permitting the Purchaser or his Accountants access to their Books and Records.

These Pre-contract steps of "Due Diligence" serve the same purpose for a Purchaser buying anything, i.e. for the Purchaser to find out as much about the product he is buying before committing himself to the Acquisition. Pre-supposing that the Purchaser likes what he sees, the Purchaser would instruct his Lawyers to prepare and submit a Sale and Purchase Agreement to the Seller's Solicitors. A Sale and Purchase Agreement would contain the following, insofar as they are relevant to the Acquisition:-

1. Seller and Purchasers name and address.

2. Consideration. This can be in cash, meaning that payment is effected by telegraphic transfer or bankers draft but equally, the consideration could be in Loan Stock or other Shares in the Purchasing Company. There may also be provision for "Earn Out" which means that the total consideration may vary according to the performance of the business over the next few years.

3. Assets and Liabilities. It is important to accurately identify all of the assets being purchased and more importantly, any of the liabilities. In many cases, when purchasing a business, the liabilities will be left with the Seller.

4. Warranties. It is important to seek and obtain full warranties from the Seller about all aspects of the Seller's business. These will include, for example, confirmation that the Accounts are true and accurate, warranties about the condition of the assets, warranties about title to the assets etc. A warranty is no more than a guarantee by the Seller that a certain state of affairs exists and if that state of affairs does not exist, the Purchaser has a claim in damages against the Seller for his loss. The Seller will seek to limit his liability under the warranties, either by seeking to cross them out or qualify them, or by disclosing against them in a "Disclosure Letter".

5. Restrictive Covenants. In view of the fact that the Purchaser is likely to be obtaining the goodwill of the business, he is entitled to, and often does seek a restrictive covenant that the Seller will not compete immediately following the sale. In that regard, it is necessary to keep the Restrictive Covenants as narrow as possible and for as short a period as possible in order to ensure that they will be upheld.

6. Employees. If the business is purchased "as a going concern", by virtue of the Transfer of Undertakings (Protection of Employment) Regulations 1981, the Employees employment rights will be transferred to the purchaser. It is therefore important to look very carefully at the employee and employment implications as they are likely to form a substantial liability to the business.

7. Intellectual Property. If the Purchaser proposes to acquire any Intellectual Property, this should be investigated separately in order to establish that it is properly registered (if appropriate) and it will be necessary upon completion to ensure that any Intellectual Property Rights are assigned to the Purchaser.

8. Property. Care should be taken in acquiring properties and a prudent purchaser should probably arrange for a surveyor to inspect them in order to ensure that there are no substantial defects. Once again, upon completion, it will be necessary to ensure that they are transferred to the Purchaser.

9. Pensions. If the business has a Pension Scheme, this needs to be examined in some depth in order to establish who the trustees are and whether all payments are up to date. Upon completion, it may be necessary to arrange for the resignation of the existing Trustees and the appointment of new ones. The principle concern is that the Purchaser does not acquire a liability by virtue of default by the Seller in maintaining the Pension Scheme.

10. Guarantees & Indemnities. Notwithstanding the taking of warranties, a Purchaser may also seek guarantees from the Seller as well as indemnities in respect of specific issues.

Completion
Completion is often effected in a meeting between the Purchaser and the Seller, with their respective lawyers. This enables final agreement on the wording of the Sale and Purchase Agreement as well as the documentation necessary to put it into effect. Having all the parties present in one room means that any outstanding issues can be resolved and all the documentation signed. Payment, as indicated above is often effected by telegraphic transfer or bankers draft.

Taxation
There are greater considerations from a taxation viewpoint for a Seller, than there are for a Purchaser because of the possibility of having to pay Capital Gains Tax on the increase in value of the business, unless one of the various relief's are available. However, some of the other taxation issues that need to be considered by a Purchaser are as follows:-

Stamp Duty
Stamp Duty is payable on the value of the consideration in a transfer document and is currently variously between zero and 3.5%. A Purchaser's Solicitor should consider carefully how to apportion the purchase price and how to structure the transaction in order to keep Stamp Duty to a minimum.

VAT
It is important that the Purchaser is registered for Value Added Tax before completing the Transaction. If he is not, the Transaction may be treated as "a supply of goods or services" in which case, Value Added Tax might be chargeable at the appropriate rate. Provided that the Purchaser is registered for VAT prior to Completion, and provided that the sale and purchase can be construed as "transfer of a business as a going concern" it will be exempt from duty.