Buying or selling a business is a milestone in anybody’s life. Amidst the emotions and excitement, it is easy to overlook a legal, financial, commercial or tax aspect of the transaction, if you are not properly prepared.
Each business or situation is unique and seeking early guidance is therefore recommended to secure the best outcome for you and your business. Below are a few points to consider.
Share or asset sale?
If the business is not incorporated as a limited company or only part of a business is being sold, the usual method of buying the business is an asset transfer for an agreed purchase price. The advantage of an asset sale is that the business’ liabilities belong to the seller. Therefore, if you are selling your business you will need to consider whether you still have liabilities that will be impossible for you to fulfil without the business. As a buyer you may be able to cherry pick the assets. Different assets require different forms of transfer and may require the consent of a third party, for example if machinery or property is leased.
The advantage in a share sale is the seller has no future legal relationship with the business. The existing liabilities, debts or obligations belong with the business and the new owner becomes responsible for them. A Share Purchase Agreement is drafted and signed at completion.
Due diligence is the process by which a buyer seeks to find out as much information as possible before committing to the purchase of a new business. A questionnaire covering all aspects of the business from its assets and accounts to its tax position and technical issues regarding the products and services it manufactures or sells is prepared by the buyer and must be answered by the seller. Often these initial questions raise further questions. It takes a significant amount of time for both the buyer and seller to prepare and answer the questions and to prepare or record the many documents inevitably involved. A buyer should ensure warranties, ie contractual statement about the state of the business, are in place in case anything goes wrong in the future.
Responsibilities when selling a business
- Limited Company
You should appoint new directors before you resign as a director yourself. Request Companies House to make the changes for you. If you have raised finances for the company via a loan secured against personal property such as your family home, you must notify the lender within 21 days, otherwise you will put your personal assets at risk. There may be capital gains tax to pay. If only part of a business is being sold you must inform any employees affected when and why you are selling and any changes to their employment status.
- Self-employed Sole Trader
The seller has a legal obligation to inform staff of the sale. You must tell them when and why you are selling the business. If relevant you must also provide details of any redundancies or relocation packages. Then of course there are tax obligations. You must let HMRC know that you have sold the business. You may have a capital gains tax bill but there are reliefs such as entrepreneurs’ relief to explore. If you are VAT registered you may be able to transfer the VAT number to the new owner. You will want to cancel your Class 2 National Insurance obligations.
The obligations are different depending on whether you are selling the whole of the partnership or just your share. The Partnership Agreement may include restrictions and conditions on the sale which ought to be considered. As above, you must inform staff and HMRC. If you are selling the whole partnership, the nominated partner must send in a tax return. If only your part, you must complete a personal tax assessment.
If you are planning to buy or sell a business, it is important to be guided by experienced professionals. We are commercially astute with a comprehensive understanding of business and company law. We offer insightful legal advice and solutions to individuals and businesses of all sizes.