Considerations Before Buying a Company

Businessmen shaking hands over legal agreements

Buying a business is rarely a simple process. There are many factors to consider and, especially if you are a first time buyer, the task may seem too great to undertake.

There are many advantages to buying a company, such as a good customer client base and existing skilled employees, as well as equipment and consents already in place. However there can be disadvantages if the reputation has been damaged, there are debts and liabilities, or where employer/employee relationships have broken down. This basic guide may help you identify some of the key points that may assist you.

How are you purchasing the company?

It is essential to realistically assess your financial limitations and capabilities. If you have underestimated the overall cost of the purchase transaction, the liabilities you did not consider may take you into insolvency. For example, these may be liabilities taken on as part of the purchase, applications for change of owner, search, surveys and legal fees, and planning permissions.

What are you buying?

You must also consider what you are actually taking over with the company. This may vary from:

1. Assets (stock, equipment, machinery)

You will need to consider the condition of the equipment and machinery and in whose names these are registered or have been purchased. It is important to know whether maintenance agreements are in place. It may be necessary to make price adjustments to reflect disrepair.

2. The building only

It is necessary to consider in whose name the building is registered or whether this is leased.

3. Shares (a holding in a company that is may or may not mean you are the controlling shareholder or the only shareholder)

4. Name of the company

It is good practice to do your research and check with Companies House to ensure the company name is registered.

Due Diligence

This is a key element of any commercial transaction that you investigate the company prior to completing the transaction to ensure that you are aware of any an all problems that arise from the company. A lot of what is discussed below are questions that arise as part of due diligence enquiries.

Is the Company Solvent?

If the company is in the process of going into administration or is insolvent, then you should consider the potential liabilities that you may be taking on when purchasing a company, such as outstanding loans or creditor claims. However, you may also be able to purchase the company at a reduced price to partly or wholly alleviate this burden and enable you to purchase the name and the assets and start again once all debts have been paid.

Has the company been correctly valued? Are there any liabilities?

Many companies look as though they are strong in their balance sheets but these will need to be inspected carefully to assess any loans, debts, and other liabilities that may not be correctly identified and the correct balance adjusted accordingly for a complete assessment before purchase. One thing to consider is whether you have the capital to cover all potential liabilities in addition to the purchase price.

Disputes or Litigation Matters?

Some companies have ongoing disputes with employees/ex-employees and third parties and this will be something that you need to identify in your due diligence enquiries to ensure that you are aware of and can negotiate with the seller to try to minimise the impact of this on you.

Transfer of Undertakings (TUPE)

The Transfer of Undertaking (Protection of Employment) Regulations 2006 (and amended by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations) 2014 are the rules surrounding employees’ rights when they have a new employer who has taken over the company that they work for. While a company purchase does not result in the change of any employer and strictly the employees continue their employment with the company as employees it is a key element of any purchase to ensure that you are aware of the employees that are being transferred with the company, what contracts that they are on, whether they are being made redundant as a result of insolvency and whether or not there are any disputes since these matter and may well affect the cash flow of the company in the future.

To Summarise...

In summary, buying a business is very complex and is very likely to be a lengthy process with a long list of requirements that often require legal experts to assure that the legal elements have all been satisfied and complied with. The guide is only a basic list that may aid you in your transaction. If you decide to purchase a company, our Business Solutions Team at Fiona Bruce llp will be happy to assist.

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This article is for general information only and does not constitute specific advice. You should not rely on the information in this article. Fiona Bruce Solicitors recommends that you seek our specific advice if you wish to rely on the any part of this article. Whilst Fiona Bruce Solicitors makes every effort to ensure that the article is accurate, Fiona Bruce Solicitors excludes all liability for claim, loss, demands or damages of any kind whatsoever (whether such claims, loss, demands or damages were foreseeable, known or otherwise) arising out of or in connection with the use of this article or any other information contained on this website. Any information provided only applies to England and Wales.