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One of the issues that we commonly face as we advise buyers and sellers of small businesses such as small retail units, hairdressing salons, sandwich bars and the like, is how the documentation formalises the transaction simply but effectively. We would normally wish to streamline the processes in these small asset purchase transactions to reflect the relatively low sale price and the anticipated simplicity of the transaction without adding complications and the associated costs that are factors in more complex deals. However, there is no such thing as a standard acquisition or sale. Each transaction has to be considered on its own merits and the purchase agreement and other documentation must be prepared and negotiated to suit the circumstances.
Risk Assessment
The essential issues that apply on a business sale for £10,000 value are largely likely to be the same as those for a much higher value transaction. The difference is the level of risk and the extent to which each party is willing to accept that risk. Risk is usually identified in due diligence process and allocated via the contractual terms. For a lower priced deal, a buyer may be willing to accept a greater potential proportionate exposure, as the risk itself should be lower overall. It is the buyer who has to make that call.
Transfer Of Assets
It should be clarified that the situation considered in this article is a transfer of assets, or ‘business purchase’ as opposed to a transfer of shares. The importance of this distinction is that in a business purchase, each of the assets of the business need to be transferred to the buyer distinctly and separately, including any property interests (such as leases, licenses or freehold transfers) and contracts and staffing arrangements, while in a share transfer, the assets of the company and staff transfer with the company to be owned by the buyer.
Summarise the details
One way for buyers and sellers to minimise their need for detailed assistance and to manage costs is to set out in writing a simple summary of details of the deal, containing background information and the essentials of the transaction. This serves both as a guide for the documentation and as a summary of the essential features of the business, for example the following:
- the buyer’s name and address,
- the seller’s name and address,
- the purchase price - is it all paid at the same time or in instalments, and how (for tax purposes) are different elements such as property, other assets and goodwill are to be apportioned,
- when is the target date for the sale to be concluded,
- how many staff are employed in the business and are they staying with the business,
- is there a property involved and how is it to be dealt with,
- what assets are there to transfer:
- stock – how and when is it to be valued
- is there any intellectual property to transfer or deal with
- are there any tools and other loose assets to list
- are any assets being transferred that are subject to finance agreements
- do any contracts need to be transferred or renewed into the buyer’s name
- What extent of due diligence and warranty protection will the buyer require in relation to the business and assets.
These are the key pieces of information that then feed into the asset purchase agreement. The simpler that list is, the simpler the documentation is likely to be. Armed with these details, advisers for both the buyer and seller will have a far better idea of what is required, whether arrangements need to be settled with third parties, for example landlords needing to give consent for the assignment of a lease or granting a new lease, finance agreements being settled, consultation with employees on transfer of the business. With this information provided at that early stage, the buyer might then wish to investigate certain aspects further.
Keeping Your House In Order
What can help sellers in the sale process is to be prepared in advance, with the background information ready to be provided to a buyer, ensuring that any contracts are up to date and that their house is generally in order. In each case, the seller needs to assemble all pertinent documents, including employment contracts, utilities invoices, services contracts, property documents. This in turn should help to streamline the purchase process and help to reduce the need for repeated enquiries and unnecessary redrafting of the purchase agreement. As a consequence then there should be a swifter resolution of the acquisition process, less stress, less effort and lower costs for all involved.