This information deals with the sale and purchase of a business by the acquisition of the assets used in it. In such a case the ownership of the company that owns the business will not change because its shares are not changing hands.
To read about buying and selling shares, click here.
The early stages of buying and selling company assets
The basic terms of a business assets sale are normally agreed between the buyer and seller, including what is being sold, the price and any special payment terms that apply. While a broker or agent may be involved at this stage, it is common for the buyer and seller to handle these negotiations themselves.
Due diligence for company asset purchases
When buying business assets, it is the buyer’s responsibility to ensure they find out as much as possible about the business they are buying. This process is known as ‘due diligence’ and will commonly be carried out with the assistance of accountants, lawyers and potentially other relevant professionals, such as surveyors.
Any information uncovered during due diligence can impact the basic terms of the sale, most commonly by reducing the amount the buyer is willing to pay for the assets if a problem is identified. For example, if a property included in the sale is found to have serious structural issues that will be expensive to fix, the buyer may ask for the cost of remedying these issues to be taken off the price they pay.
For this reason, it is absolutely essential that due diligence be carried out rigorously and in a timely fashion to ensure the buyer’s interests are protected and any issues can be swiftly resolved.
Contracts for the sale of business assets
Once the basic terms of the asset sale are agreed, the buyer’s solicitor will normally draft the contact of sale. These legal agreements are usually complex and will need to be reviewed by the seller and their solicitor and any amendments agreed between both parties.
The contract of sale of company assets will typically include:
- What assets are being sold and what are being kept by the seller
- The price to be paid for the assets
- What existing liabilities the buyer is accepting
- What current contracts the buyer will take over
- How payment will be made, including whether this will be by instalments and provisions for how any targets or other variables will influence the sale price
- Any post-completion restrictions covering what the seller can and cannot do following the sale
- Any limitations to the seller’s liabilities towards the buyer
Defining the assets included in the sale
When a business is sold via an asset sale, the buyer will be acquiring only what they have agreed to buy. It must be made clear what assets the buyer will take and what will remain with the seller.
This can be done in one of three ways:
- By stating that all assets used in the business are to be sold. This can be difficult to determine
- By stating that all assets used in the business are to be sold, but excluding specified items. This is better than the first option, as it would usually be interpreted as meaning that an asset is included unless it is on the list of excluded items
- By stating that only a list of specified included assets are to be sold. This is the clearest choice
Liabilities and contracts
With the exception of liabilities and contracts relating to employees (see below), the liabilities, contracts and other obligations of a business do not automatically transfer to the buyer in an asset sale, but must be expressly accepted by the buyer. This can be a very important issue as the existing contracts of a business are often one of the main reasons the buyer wishes to buy it in the first place.
It is also very common for the consent of the customers or suppliers to the business to be required before their contracts can transfer to the new owner. The buyer and seller may sometimes discuss the potential sale of the business with important customers or suppliers before completion, to ensure that there will not be any difficulties.
Under the Transfer of Undertakings (Protection of Employment) Regulations, commonly referred to as TUPE, where a business transfers from one owner to another, the employees will usually automatically transfer with the business.
After the transfer, the employees will be employed by the buyer as if the buyer had always been their employer. This means that, for the purposes of calculating length of service, the employee’s period of employment with the buyer is deemed to include the time they worked for the seller as well.
Any pre-existing liabilities (including claims for unpaid wages or other employment disputes involving current employees) will also pass to the buyer. The buyer and seller cannot avoid the application of the TUPE Regulations.
Employees who are dismissed for reasons connected with the transfer will generally have a claim for unfair dismissal.
For more on TUPE, click here.
Warranties for asset sales
An asset sale should contain warranties in the form of a set of statements, made by the seller, detailing the state of the business and the assets included in the sale. This will normally include comprehensive provisions relating to the assets and the business generally, as well as covering its employees and any disputes or litigation related to the business.
It is the seller’s responsibility to ensure the warranties they provide are true and accurate and they may face legal consequences if this is not carried out correctly.
Limitations on the seller’s liability for business asset sales
While the seller will usually have some degree of liability towards the buyer during and asset sale, the contract should contain limitations on the seller’s liability.
Common limitations on a seller’s liability include:
- A minimum size of claim the buyer is entitled to bring (preventing the seller from being bothered with numerous small claims)
- An overall financial limit on the seller’s liability (usually set at the purchase price or a fraction of it, so the buyer can never claim more than they paid for the assets)
A time limit for claims (set from the date of completion of the sale)
Post-completion restrictions on business asset sales
The contract of sale for business assets will often include restrictions on the actions the seller can take post-completion. This is intended to protect the buyer’s business interests where the seller could potentially take action that conflict with those interests after the sale.
Commonly included restrictions are that the seller should not:
- Be involved in a competing business for a fixed period following the sale
- Entice employees of the business to leave in order to work for the seller
- Entice the customers of the business to transfer their custom to a new business operated by the seller
Stamp duty on business asset sales
Other than land, the sale of assets does not generally attract stamp duty.
Tax on asset sales
When buying a business as a going concern, the sale will not normally be subject to VAT. However, if you are just buying assets of the business, you will not usually be buying it as a going concern, so you may need to pay VAT on the sale depending on the circumstances.
It is therefore essential to take specialist legal and financial advice to ensure you meet your tax liabilities.
How we can help with business asset sales and purchases
Wheelers’ company and commercial team have been advising businesses on all stages of asset sales and purchases for many years. We can also offer comprehensive legal support for all legal issues connected to running a business, including those related to property, employment and all types of commercial agreements.
If you have any questions or are looking for information on asset sales or any other business law matter, please contact Catherine Drew