Buying a business can be a strategic way to grow your operations, enter new markets, or secure valuable assets. But beneath the surface of any opportunity lies a web of legal and financial considerations that can easily derail even the most promising deal if not properly managed. At Slater Heelis, our corporate solicitors have extensive experience advising on business purchases of all sizes, helping clients avoid costly pitfalls and achieve smooth, successful transactions.
In this guide, we explore the key legal issues you need to be aware of before buying a business and how the right legal support can protect your investment from start to finish.
Asset Purchase vs Share Purchase: Choosing the Right Structure
One of the first decisions you’ll need to make is whether to proceed with an asset purchase or a share purchase. The two routes have significant differences:
- Asset Purchase involves buying specific assets and liabilities of the business (e.g., equipment, stock, contracts). The buyer can often cherry-pick what they take on.
- Share Purchase involves buying all the shares in the company, including its assets, liabilities, and historical risks.
Each option has tax, legal, and commercial implications. Share purchases tend to be a simpler operation, as the business continues as usual. However, asset purchases may offer greater protection from hidden liabilities. We can help assess which option is most appropriate for your goals and risk appetite.
Due Diligence: Digging Below the Surface
Thorough due diligence is essential. It allows you to investigate the company’s finances, contracts, employment matters, intellectual property, litigation risks, and more. Missing red flags at this stage can result in unexpected liabilities or underperformance after completion.
Our team conducts detailed due diligence on your behalf and works closely with financial advisers and tax experts to ensure no stone is left unturned. Areas typically covered include:
- Corporate structure and ownership
- Key customer and supplier contracts
- Regulatory compliance
- Ongoing or potential disputes
- Employment and pension arrangements
- Property and lease agreements
- Ownership of intellectual property
Warranties and Indemnities: Protecting Against the Unknown
Even the most detailed due diligence won’t reveal every risk. That’s where warranties and indemnities in the Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA) come in. They operate as a post-completion price adjustment mechanism, for example if something comes to your knowledge after completion, but should have been brought up beforehand, you can make a claim in order to recover the loss of the purchase price paid on the basis that if you knew of it earlier, you could have potentially lowered the price. The difference between warranties and indemnities are:
- Warranties are statements of fact about the business. If they turn out to be false, the buyer may have a claim for breach, however, such claim must be mitigated and it may not be possible to recover all of your costs of making the claim. Therefore, warranties are commonly used for low-risk matters.
- Indemnities provide compensation for known specific risks that have a high likelihood of happening, such as an ongoing legal dispute or unresolved tax issue. If an indemnity claim is successful, the buyer will be able to recover £1 for £1 of their loss, plus all costs and expenses in bringing the claim.
It is therefore crucial when negotiating the transaction to ensure that any potential risks are suitably protected, using robust warranties and indemnities to ensure that you are paying the right price for the target business.
Employment Matters: TUPE and Beyond
If you are buying a business (and not shares in a company) with employees, you may need to comply with the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). TUPE ensures that employees retain their existing terms and conditions after a transfer.
Failing to consult properly or make necessary arrangements can lead to claims of unfair dismissal or breach of employment law. Our Corporate team work closely with our Employment solicitors to guide you through your responsibilities and help you engage with employees and trade unions where required.
Restrictive Covenants and Retention of Key People
If you’re buying a business where the value is heavily tied to specific individuals, such as founders or key staff, it may be vital to include restrictive covenants or transitional service agreements.
Restrictive covenants prevent sellers from setting up competing businesses or poaching customers or employees. Transitional arrangements may require the seller to remain involved for a set period post-completion to support the handover.
We can draft and negotiate suitable protections tailored to your specific situation.
Tax Considerations when Buying a Business
Every business transaction has tax implications. For the parties to the transaction, this may include capital gains tax for the seller and VAT, stamp duty, or SDLT for the buyer. Structuring the deal in a tax-efficient way can save both parties money and avoid unnecessary complications.
If you are buying a company, then you will acquire all potential unpaid tax liabilities for up to 6 years before the date of the transaction. It is therefore crucial to have a properly negotiated tax deed that apportions the risk between the buyer and the seller.
We work closely with tax advisers to ensure that the transaction is structured optimally and that all liabilities are clearly understood and accounted for in the purchase price.
Get In Touch
Scott Sands is a Partner and the Head of our Corporate team. He advises on a wide range of corporate matters, including acquisitions, disposals, private equity investments, corporate governance, tax-led structures and inheritance tax planning including family investment companies.
If you’re considering buying a business, get in touch with our Corporate team today. We’ll talk you through your options and provide practical, commercially focused advice tailored to your circumstances.
Call us on 03301 624 681 or fill out our contact form to arrange a consultation.
