Many existing and prospective business owners may well find themselves considering the pros and cons of buying a business. You may be looking to expand your current business and are looking for a good, commercial fit; you may have been alerted to an opportunity you cannot refuse; or you may be an entrepreneur looking for the next challenge.

Obviously all transactions will differ to some degree but a common factor in a successful purchase is good preparation: the better organised you are, the smoother the overall process. This guide aims to outline the four main stages involved in buying a business. 

Letter of Intent / Heads of Terms

This document indicates that the sale of the business is a serious proposition. It should confirm the main terms of the sale; set out the timetable and obligations of both parties; and may include some binding clauses such as non-solicitation and confidentiality provisions.

Due diligence

Once you have broadly agreed terms, the next step is to investigate the company you want to buy. This will include details of its financial and legal position, what assets (including property) it owns or leases, the number of employees, the material contracts etc. Your research should give you a clear understanding of what you are planning to buy and help to resolve any outstanding issues arising from your initial negotiation; indeed you may wish renegotiate preliminary terms before proceeding further.

Transaction and transaction documents

This is the stage where many of the points covered in the Heads of Terms are documented to provide guarantees, indemnities and warranties to cover any issues that have arisen from the due diligence exercise and the general state of the business. These documents cover the scope of the transaction and provide the basis for the sale agreement as well as a means of resolving any issues that arise post-sale. 

Closing / post-completion matters

In a straightforward sale, this stage may simply involve signing the completion documents and transferring the monies. More complex deals will require more attention and this will be determined by the structure of the transaction such as the purchase price being governed by the business achieving set targets and / or certain regulatory provisions, such as competition requirements.

No transaction is the same but the stages outlined above are the most fundamental and apply in the majority of cases. Depending on the size and type of business you want to buy, you will probably need to invest in professional advice at the due diligence stage to ensure that no stones are left unturned in the quest for information. Without a thorough understanding of what it is you are buying you could be in danger of making a major financial mistake. In addition, these early investigations can give you the tools to renegotiate the deal, potentially saving money and time further down the line. For advice and help on purchasing a business, please contact a member of the corporate team who would be delighted to have an initial discussion about your plans. 

About the author

Raashi Jain-Tomita Solicitor

Raashi specialises in acquisitions, disposals, investments, joint ventures, private equity matters, restructurings and shareholder agreements.