Complete when?
Once a sale has been agreed it is usually in the interest of both parties to complete as soon as possible. The seller will have lost interest in day to day operations while the buyer is not only bursting with enthusiasm and ideas but fears the seller will neglect vital matters.
The problem with immediate completion is that certain matters may necessarily be deferred. Examples of matters unlikely to go wrong are: transfers of domain names and obtaining landlord’s consent to an assignment of a lease. However, consider the finalisation of a commercial contractor a referral to the Competition Commission. In considering the question of completion now or later, you have to assess the chances of anything going wrong with outstanding items
If a delay is necessary, make it as short as possible. Domain names and web site
One business might operate exclusively via the Internet. Another may be as solidly rooted in “bricks and mortar”. So the importance of domain names and web sites will vary greatly from one transaction to another. Although a domain name may be transferred at will and very easily, the registration of the buyer as owner may be time consuming and complicated. This is not the page to tell you exactly what is involved in every different upper level domain, but it should be the responsibility of the seller to do whatever is necessary to obtain the registration of the buyer as owner of the name.
Web sites, like any other intellectual property, can be transferred within the agreement. However, there are a few considerations which need attention by the buyer and seller such as:
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Making appropriate arrangements with the web site host;
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Obtaining or maintaining merchant service facilities;
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Transfer of software and other licences. Many software licences prohibit transfer without licensor’s consent; so continued use by the business buyer without consent would be a breach of the licence terms, which could lead to termination by the licensor.
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Affiliate management system;
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E-mail response systems;
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Other services provided. Transfer of employment contracts
This is a subject in itself. Full information is provided in another article.Often a business changes hands because the new owners hope to operate it more efficiently than the existing owners. One way they might choose to save money is by employing fewer staff. Contracts of employment are safeguarded against this possibility by Transfer of Undertakings (Protection of Employment) Regulations 1981 (SI 1794), amended numerous times since. The Regulations provide for continuity of employment on the same terms as existed before the change of ownership. It is still possible to reduce the workforce for usual reasons, but you should take professional advice before approaching staff with a view to terminating their employment.
Transfer of commercial contracts
In any business there are ongoing contracts. These will be for supply of the goods or services of that business and for the purchase of goods and services of every kind. As a business buyer, you may assume that all such contracts will be transferred with the business. This is not so. The contract is with the owner of the business, whether a company or individual. The other party to a contract may be in a position to cancel a contract if the business seller transfers the business. It is therefore most important that the seller investigates and prepares the ground on all contracts, so that the buyer can obtain the benefit of them. Some contracts will be transferable without notice, some only with notice or consent. The buyer should make sure the consent is in writing in the case of all contracts that go to the heart of the business. Landlord’s consent
Where a business operates from leasehold premises, the assignment of the lease is essential to the ongoing business. Unfortunately, few landlords share the buyer’s enthusiasm to take the business over, or the seller’s, to bank his cash. The best way to persuade a landlord to act fast is to negotiate with him directly, by telephone. Do not leave it to your solicitor. There is no point in paying £250 an hour for work you could do in minutes. Even if the landlord is a big company or pension fund, somewhere there is someone responsible for your premises who is able to make a decision. Get that person onside and you are almost home and dry. If the response is a disappointing “Please refer to our solicitors”, be ready to reply “I should be pleased to follow whatever procedure you have, but can I take it you will agree to our proposal and help us to conclude it quickly”. When they say yes, ask them to instruct their solicitor quickly. Be prepared to “grovel”. Of course, you are entitled as of right to what you ask, but you do not have any entitlement to getting it done as quickly as you would like!
A frequent cause of delay in obtaining landlord’s consent is that the buyer is not ready with good references. Landlords’ requirements vary, but none ids likely to require more than bank, last landlord (if any), and two others. Make sure you have them to hand when you ring to seduce the landlord into fast action.
If there is provision in the lease for a guarantor it may be difficult to resist a demand by the landlord that the buyer also provides a guarantor. Even if there is none now, the lease may provide either expressly for a guarantor, or some other term, which enables the landlord to refuse an assignment to a person without clear “substance”. So, if the seller proposes a new tenant (his buyer) with less substance than himself, the landlord may be in a position to refuse the assignment. You need to read the lease carefully to find out the position on this before accepting the buyer’s offer to buy the business. Where the tenant is a limited company, the personal guarantee of one or more directors is invariably required.
It is likely to be provided in the lease that that the legal costs of the landlord in connection with the consent are payable by the tenant. The buyer usually picks up this bill. The going rate is £400 - £800, for drawing the document, obtaining the approval of the tenant and of the proposed new tenant, taking up references and completing the three sided agreement. The buyer wants his money back!
Under certain conditions, the buyer may be able to rescind his contract. He may choose instead to claim damages. When a contract is rescinded, the result is that everything goes back to the position before the contract was made so far as possible. In this case the buyer gets his money back and the seller gets his business. Of course, this would be a “disaster scenario” for the seller in most cases. Because this is such a powerful weapon, it is most important that the buyer considers carefully (and negotiates) the circumstances when it might apply. The remedy of rescission should be available to a buyer only when the seller has failed to comply with thee terms of the contract in the most serious way.
The best option for the seller is to provide full information in advance of the sale and to prepare all “sticking points” such as landlord’s consent to assignment of lease and transfer of web site, before the formal agreement is signed. It should be within the power and control of the seller to eliminate situations where disaster might strike. If he does that, then he has nothing to fear from a provision for the contract to be rescinded in specific circumstances.
The question of rescission or damages for breach of contract by the seller is bound up with the warranties. This comes back to those words so beloved of novel writers “due diligence”. Due diligence means “appropriate care”. Less formally, you might say the buyer has to do his homework. The impression is that the buyer has to work on “due diligence”, but actually it is the seller who has to line everything up and dust out the filing cabinets to remove contractual skeletons. The buyer can merely sit back in his chair and assess what information has been provided. VAT on sale of business
Briefly, the position is that when a business is sold as a going concern, the sale of the assets does not normally constitute a taxable supply provided:
(a) The assets sold are to be used by the purchaser in carrying on the same kind of business as that carried on by the vendor; and
(b) Where the sale comprises only part of the vendor’s business, the part sold is capable of separate operation.
Customs and Excise has issued comprehensive guidance on this subject, which you can find quickly at page VAT: sale of business.
You may need to look also at the VAT provisions on sale of property. Owners of buildings and land, the supply of which would otherwise be exempt from VAT, have been able to make elections to waive exemption from VAT in respect of some or all of the buildings and land in which they have an interest. Once made, an election to waive exemption from VAT cannot be revoked whilst the buildings and land remain in the same ownership.
When properties, for which an election to waive exemption has been made, or new properties, are transferred as part of a sale of business as a going concern, the transfer of the properties will be standard rated for VAT unless the transferee has made an election to waive exemption in respect of the properties and has notified HM Customs and Excise of that election on or before the date and sale is completed. For VAT purposes a freehold building remains new for three years after completion. |
