Buying a business UK beginner's guide: structure, due diligence, price and finance

Business acquisitions are complex, and getting the legal side wrong leads to unnecessary legal issues and wasted money. If you are buying a business in the UK for the first time, there are four main principles you need to understand before anything else: whether to do a share purchase or an asset purchase, what to look for in legal due diligence, whether the price is fixed or performance-based, and what finance is available. This guide walks through each of them, in the order I would want a first-time buyer to think about them, because each decision shapes the next.

Asset purchase vs share purchase

If you are deciding between a share purchase and an asset purchase, here are the key differences from a legal perspective.

With a share purchase, you are buying the entire limited company and everything that comes with it. The way I put it to clients is that you are buying the whole basket with all the fruit inside.

With an asset purchase, you are not buying the limited company. You are buying certain assets from it. Going back to the basket, you are not buying the basket at all. You are cherry-picking the pieces of fruit you want.

That difference drives almost everything else in the deal. On a share purchase, the liabilities in the basket come with it, which is why due diligence matters so much. On an asset purchase, you leave the company and its history behind, but you have to make sure each asset you want actually transfers to you, including the contracts. That is the due diligence point below. For a fuller comparison, see share purchase vs asset purchase.

Due diligence: change of control and assignment

There is a great deal to cover in legal due diligence, but I want to focus on one thing, because I believe it is one of the most important checks from a legal perspective. Which check it is depends on the structure you have chosen.

Share purchase: change of control provisions

If you are doing a share purchase, look at the change of control provisions in the contracts between the target business and its customers and suppliers. A change of control provision allows the customer or the supplier to terminate their contract with the target company if there is a change of control. A change of control is usually defined as more than 50% of the voting shares being sold to a third party, which is exactly what happens when you buy the company.

The reason to look for this is simple. If you are buying the business because of the strong relationships it has with its suppliers, or the strong contracts it has with its customers, for example subscription contracts, you want to avoid the situation where you take over and those suppliers and customers now have the right to walk away. The value you paid for was in those contracts, and a change of control clause can let it leave the building on the day you arrive. So read the key contracts before you agree the price, and if there are change of control clauses, deal with them before completion, typically by getting the other party's consent in advance.

Asset purchase: the right to assign

If you are doing an asset purchase, the thing to look out for is the right to assign. You will not be buying the entity that is a party to the customer contracts, so if you want those customers, the business will need to assign the rights and obligations under those contracts to you or to your own company. That is only possible if the contract stipulates that the business has the right to assign. If it does not, the customer contract may not be yours to take, and the customers you thought you were buying stay with the company you did not buy. So on an asset purchase, the question for every contract you care about is: can this be assigned to me, and on what terms?

If you want to go deeper on what to ask a seller, read questions to ask when buying a business.

Purchase price: fixed vs performance-based

There are two broad purchase price mechanisms.

• Performance-based. Part of the price is paid on completion and part depends on how the business performs afterwards. Take an example purchase price of £100. You might decide that 50% is payable on completion, the day you take over the business, and that the remaining 50% is affected by the performance of the business afterwards. If the business makes more profit than anticipated, you may end up paying the seller more. If it makes less profit than anticipated, you may pay less.
• Fixed, or locked box. The alternative is to fix the price up front. Here the purchase price is fixed and is not affected by the performance of the business. It is £100, it is £100 today, and regardless of the financial performance of the business twelve months down the line it stays at £100. Even if there is an element of deferred consideration, you still have to pay the full amount to reach that £100.

Which one suits you depends on how confident you are in the numbers and how much risk you want to share with the seller. A performance-based element protects you if the business underperforms after you take over, but it also means the seller has an interest in how you run it. A fixed price gives both sides certainty, and puts the risk of underperformance on you. I explain the mechanics in more detail in locked box vs completion accounts.

How to finance a business purchase

What kind of financing is available to help you buy the business? Most first-time buyers assume they need the full price in cash, and most do not. There are three main types of finance to consider.

• Asset-based lending. You approach a lender and give them, as security, the assets of the business you are looking to buy, in return for money. For example, if the target business has premises, you might get something like a mortgage secured against those premises.
• Invoice financing. The invoices the target business has sent to its customers, but which the customers have not yet paid, are used as security to get a loan. The business's own receivables fund part of the purchase, which works best for a business with a solid book of customers who pay on terms.
• Seller financing. Put simply, you pay a little on completion, the day you take over the business, and the rest is deferred over a period of time. Effectively the seller is giving you a loan, and the business you have bought generates the money to repay it. I cover this in depth in seller financing to buy a business.

These options are not mutually exclusive. Many deals use a combination, with some seller finance alongside lending secured on the business's own assets, so that the cash you need to find on completion is kept to a minimum.

Next steps

Decide on the structure first, because it determines what you need to check in due diligence and what the purchase agreement looks like. Then agree with the seller how the price will work and line up your finance before you commit. Speak to a corporate solicitor early so the structure, the due diligence and the price mechanism are dealt with together rather than one at a time. For the stages you will go through from offer to completion, read how to buy a business in the UK.