Which legal documents you need when buying a business?

| 3 min read

Are you looking for a business to buy? Read on to find about which legal documents you will need.

Buying a business can be a complicated process and which takes hard work and a fair dose of luck. You need the right guidance so that the process goes smoothly.

Purchasing asset vs. Purchasing share

You first need to understand the difference between the two. For instance, take this example:

When buying a sole trader or partnership business, you will have to buy the assets since there will be no shares to buy. However, if the business you are purchasing is a company then you have a choice of either buying the assets from the company or shares from the shareholders of the company.

You will want to cherry pick the assets as the buyer, leaving the liabilities behind. However, the seller will prefer to sell their shares so that the can hand over the business to you including its liabilities.

So the decision to buy assets or shares is a crucial one and will largely depend of the type of business you will be buying, the circumstances of the sale, as well as the licenses the business might require.

Initial documents

Non-disclosure agreement

Before the seller can start divulging information relating to business to you, the seller will want for you to sign a non-disclosure agreement. The terms of the non-disclosure agreement will vary from one business to another. However, the point behind it is that the seller will want to keep the sale confidential.

Due diligence questionnaire

The process of due diligence is one that provides a thorough investigation into a proposed investment transaction. It means you check the investment worthiness, and assess the full claims made by the owner.

This check is usually performed by a solicitor and accountant who act on behalf of the buyer. A large portion of due diligence will involve checking financial statements and accounts. They will prepare a questionnaire which the seller will have to provide a reply to.

Asset purchase agreement

Your lawyer will then prepare an asset purchase agreement. It should generally cover the following:

  • Stock – you will have to list out the stock and value it. This value will be adjusted against the final purchase price.
  • Plant and machinery – it should cover all the plants and machinery you will be purchasing. Make that the hire purchase or lease agreements of any plant or machinery.
  • Employees – do you want to purchase the business as a going concern? In such a case, the employees will also be transfer.
  • Contracts – every contract the business is a party to should be sought and reviewed during the due diligence stage. You want to specify each of these contracts in the asset purchase agreement and add clauses so that you are protected from any potential liability in those contracts.
  • Goodwill – this is representative value of the brand of your business, its customer base and any intellectual property.
  • Warranties – contractual statements made by the seller pertaining to the business before completion.
  • Transfer documents – you will need a formal transfer document, just as in any other conveyance.
  • Landlord consent – is the business premise leased? Then you need the landlord’s consent for the lease to be transferred or assigned to you.

Share purchase agreement

Is your deal structured such that you are purchasing company shares? Then you will need share purchase agreement. As a shareholder, you will in effect be taking on all of the assets as well as liabilities of the company.

The buyer is expected to come up with the first draft. The main points in should include are the following:

  • Warranties – These are contractual statements made by the seller in relation to the business before completion. Warranties should be tailored to the issues discovered during due diligence. Further, you have to be reasonable in terms of scope of the warranties.
  • Limitation of liability – the seller will want to include clauses which limit their liability in terms of the amount of liability and the for how long they can remain liable.
  • Indemnities – these can be a more powerful recourse than a warranty.
  • Restrictive covenants – you may way want to restrict what the seller can do. For instance, you will not want the seller to compete with you. So you can include a non-compete clause.
  • Disclosure letter – the seller will want to record any exception or qualification to the warranties you propose. This will be through the disclosure letter.

Completion documents

Completion agenda – this is a practical way of helping you keep track of practical things such as VAT registration, payroll, national insurance, building and contents insurance.

Board minutes – if you are buying shares in the company, you will board minutes for the share transfer and other formalities.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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