How to structure a business purchase agreement: 10 things I would do as the buyer

If you are speaking to sellers and trying to work out how to structure your offer, or drafting heads of terms and worried about missing something that will cause trouble later, this is how I would structure a business purchase agreement if I were the buyer. I have acted for buyers on dozens of acquisitions and drafted these documents many times, so I know where the risks sit. These are the ten things I would do.

Buy through an SPV (special purpose vehicle)

The very first thing I would do is buy via a special purpose vehicle. An SPV is a newly incorporated limited company, set up at Companies House, whose sole purpose is to buy the shares in the target business.

The reason is separation. I want the SPV to be the entity that owes money to the seller, not me personally. Because a large part of the price will be deferred and paid over time, the seller will want that debt secured against something. If the debtor is the SPV, my personal assets are not on the line. I do not want my house in this deal. The SPV holds the shares in the target after completion, and it is the SPV that makes the deferred payments to the seller out of what the business generates.

Debenture instead of a personal guarantee

Because you are buying through an SPV, the seller will typically open negotiations by asking for a personal guarantee: a contract under which you personally guarantee the SPV's payment obligations. That puts your home back on the line.

The second thing I would do is reject the personal guarantee and instead offer the seller a debenture over the target business. A debenture is security over the assets of the business itself, so the seller-financed loan is secured against the company's assets rather than against you. The seller gets security; you keep the separation the SPV was created for. Expect this to be a negotiation, because asking for a guarantee is usually the seller's opening position, but a debenture gives the seller real security over a business they know well.

Seller finance: pay no more than 30% on completion

The third thing is to pay no more than 30% of the purchase price on completion, and ideally to pay that 30% from funds already in the company's bank account. On a £1 million deal, that means roughly £300,000 on the day you take ownership, drawn from the target's own cash, with the remaining 70% deferred and financed by the seller.

There are two advantages:

• The seller keeps skin in the game. They want the business to do well so that they receive their 70%.
• You do not need third-party lenders. No invoice finance, no asset-backed lending, no additional party wanting its own security or a personal guarantee, and no interest paid to a bank. The deal is simpler, cheaper and more likely to complete.

A right of set-off against deferred payments

The fourth thing is to give myself the right to set off claims against money I owe the seller. Set-off is simple: if I owe someone £5 and they owe me £7, they just pay me £2.

The real advantage is not administrative. Because I owe the seller 70% of the price over a number of years, if any warranty turns out to be untrue I do not have to chase the seller for money, send letters and hope they pay so I can fix the problem in the business. I simply deduct the amount of my claim from the next deferred payment. The deferred price becomes my security for the seller's promises, and the set-off right is what makes the deferred structure work for the buyer rather than only for the seller.

Extensive warranties

Fifth, I would include extensive warranties. A warranty is a promise the seller makes about the state of the business, for example that the target owes no money to HMRC. If it turns out to be untrue, I have a claim for breach of warranty.

I want extensive warranties for two reasons. First, they strengthen the right of set-off: more promises mean more things I can deduct for. Second, they protect me against unknown issues. As the buyer, I am responsible for due diligence, but if I missed something, or something simply did not surface, the warranties are my fallback.

In practice, if I am worried about something, I turn it into a warranty. I want the warranties to say, in effect, that the business is a good business, there are no issues with it and everything has been done properly, so that if any of that is untrue I have a claim and can set it off. The warranty schedule, typically schedule 3 or 4 of the agreement, often runs to dozens of pages, and I want it that way.

A tax covenant

Sixth, a tax covenant. This is a schedule to the agreement that protects me against tax liabilities of the target relating to the period before completion. If the company owes HMRC for pre-completion trading, that must be paid before completion or I claim it back from the sellers and set it off against the deferred payments.

The reason it matters is that tax liabilities are often unknown. Sellers may genuinely believe everything has been paid, and then HMRC opens an investigation and decides the company owes more. As the new owner, you are the one who has to pay HMRC. The tax covenant lets you recover that money from the sellers.

Cash-free, debt-free price adjustment

Seventh, I would structure the whole deal on a cash-free, debt-free basis. The seller leaves an agreed target amount of cash in the business and keeps any excess. Any liabilities left in the business reduce the price pound for pound. If there is more cash than the target, I pay more; if there is debt, it comes off the price.

Why? Usually at least three months pass between heads of terms and completion. The business keeps trading and paying bills, but the seller could also take out loans in the company's name that I never budgeted for. I want the business, its systems, people and assets, without the liabilities, and with enough working capital to run it for two to three months.

Restrictive covenants for sellers

Eighth, restrictive covenants. You will have seen these in the employment contracts of senior employees. In a purchase agreement they restrict what the sellers can do after the sale, typically preventing them from poaching clients, suppliers and employees from the business they have just sold you. Sellers usually have strong relationships with those people, and without covenants nothing stops them using that position against you the day after completion. The business you paid for is largely those relationships, so the covenants protect the value of the deal.

Transition period services

Ninth, I would ask the seller to provide transition services. From completion the business is my responsibility, and I may appoint a manager to run it. I want the seller to work with that manager and show them how things work: where things are, the passwords, the keys. This is especially important if you are not already an employee of the target and this is not a management buyout, though even an MBO team benefits from a handover.

Waiver of the seller's claims against the company

Finally, something buyers often overlook: I would ask the seller to waive any claims they may have against the target. A seller can have claims against their own company, for example for unfair dismissal in their capacity as an employee, or for money they say the company owes them. The waiver is signed as a deed and witnessed, so the seller confirms the company owes them nothing and they have no claims against it. It sits with the ancillary documents alongside the SPA, and it is a short document that closes off a risk most buyers do not know exists.

Next steps

Get these points into the heads of terms before the SPA is drafted, because it is much harder to introduce an SPV, a price adjustment or a set-off right once the seller thinks the deal is agreed. Then have a corporate solicitor draft the purchase agreement and the ancillary documents around them, and run proper due diligence alongside.