Buying a business in the UK: three things to know before you make an offer

If you are buying a business in the UK, there are three things to understand before you make an offer, and one legal principle that sits behind all of them. The three things are who drafts the documents, the difference between a share sale and an asset sale, and how seller financing works. The principle is caveat emptor: buyer beware. Here is how each of them helps you secure the best deal possible.

Who drafts the documents when buying a business?

First, understand who is responsible for the documentation. You, as the buyer, will be expected to produce the board minutes, the general meeting resolutions and the sale and purchase agreement.

That might sound like a burden, but as a solicitor I would advise you to see it as an opportunity. Whoever holds the pen decides what the first draft says. Use it to include clauses that are very much favourable to you: the warranties you want, the protections you need, the payment terms that suit you. The sale and purchase agreement is always going to be negotiated, and if the seller is not agreeable to a particular clause, it can always be reduced in scope. But you start from your position, not theirs. For what to put in that first draft, see business sale and purchase agreement.

Share sale vs asset sale

Second, understand the difference between a share sale and an asset sale.

• Share sale. You are buying 100% of the shares, and the whole company comes with it: its assets, its contracts, its employees, and also its liabilities, known and unknown.
• Asset sale. You are cherry-picking the assets you want and buying only those. The company itself stays with the seller, along with anything you did not choose to take.

If you are a buyer, you might want to consider an asset sale. The reason is that it avoids you taking on hidden liabilities. If there is a claim lurking in the company's history, it stays with the company, not with you. That minimises your risk. Whether it is the right structure depends on the deal, and I compare the two in detail in share sale vs asset sale.

How seller financing works

Third, know about seller financing. Seller financing allows you to buy a business with no money down. Usually the buyer uses the money generated by the business they have just acquired to pay back the seller over time. In effect, the seller lends you the price and the business repays it.

If you are interested in seller financing, I would advise you to speak with the seller as soon as possible about this option. Sellers do not like surprises on price, and a late request to defer payment can unsettle a deal that was otherwise agreed.

To show that you are serious about the purchase, present your offer in the form of professionally drafted heads of terms. A well-drafted document sets out the price, what is paid on completion and how the balance is paid, and it tells the seller that you have thought the structure through. I cover the detail in seller financing to buy a business.

Caveat emptor: buyer beware

The last thing to be aware of before buying a business is that the legal principle of caveat emptor applies. Caveat emptor is Latin for buyer beware. It means that the buyer is responsible for satisfying themselves with their purchase. In other words, you are responsible for conducting the searches and enquiries needed to make sure you are making the right decision. The seller is not obliged to volunteer the problems.

For this reason, it is always advisable to have legal advisers conduct due diligence on the buyer's behalf. They know what to ask for, what to look for and what the answers mean, and what they find can be turned into warranties and price adjustments in the SPA you are drafting.

Next steps

Decide on the structure, share sale or asset sale, before you make an offer, because it shapes everything that follows. If you want to use seller financing, raise it with the seller now and have heads of terms drafted professionally. Then appoint a corporate solicitor to run due diligence and produce the first draft of the SPA on your terms.