Your Guide to the Liabilities to Consider when Buying or Selling an Existing Business

Your Guide to the Liabilities to Consider when Buying or Selling an Existing Business

When you’re buying or selling a business, it is very easy to focus just on getting the deal completed. However, it is also all too simple to miss some crucial points that may have far-reaching and ongoing implications, making proper due diligence a vital part of a business purchase and proper understanding of the sale agreement a must for the seller.

Understanding the Business Sale Process

The process of selling a business involves several critical stages, from initial due diligence to the final transfer of ownership.

During each stage, it’s vital to closely examine various liabilities associated with the business and its contracts.

Types of Business Contracts

1. Employee Contracts 
Employee contracts define the terms of employment between the business and its staff. These agreements cover salaries, benefits, job roles, and termination or severance pay conditions.

When a business is sold, the new owner inherits these contracts and assumes the responsibilities and obligations therein.

This includes any ongoing employee disputes, legal issues, or potential liabilities like severance payments or unresolved employment rights issues.

2. Supplier and Customer Contracts 
Contracts with suppliers and customers outline terms such as delivery schedules, payment terms and penalties for contract breaches.

These contracts may also encompass aspects like outstanding orders or service level agreements (SLAs).

The new owner must understand these contracts to maintain business continuity and manage liabilities related to contractual obligations and potential penalties for non-compliance.

3. Lease Agreements 
If the business does not own its property, there should be a lease setting out the terms on which it occupies, including the lease duration, rent amounts and conditions for lease renewal or termination.

The buyer will need to make sure that any leases are valid and offer the security needed for the ongoing business and must make sure that it understands all financial and legal obligations associated with the property lease.

Inherited Liabilities

When acquiring a business, it’s not just the assets that transfer to the new owner – there’s also the potential inheritance of various debts and legal obligations.

These liabilities can significantly impact the value and operational scope of the business. Key inherited liabilities include:

• Outstanding Debts: These might include loans, credit agreements, or other financial liabilities that the business has incurred.
• Legal Disputes: Any ongoing legal issues or potential litigation against the business are transferred to the new owner
• Regulatory Compliance: The business may need to comply with industry-specific regulations and standards, which can vary significantly depending on the sector.

Understanding the legal aspects of the business sale process is essential for both sellers and buyers. It ensures that a seller can properly prepare the business for sale in order to make the change of ownership as smooth as possible and helps the new owner manage the business post-purchase without dispute or delay.

Seller Liabilities

A seller cannot just assume that they walk away from liability when they complete the sale.  The sale contract will inevitably contain obligations to the buyer, such as

Warranties in respect of the business and it’s tax affairs

Indemnities in respect of known issues that come to light during the buyer’s investigations
Post-completion restrictions that will limit what a seller may do for a period after completion (also known as non-competition clauses)
Unless a seller carefully and fully discloses information about the business and limits its liability as much as possible, there is a risk of claims being made by the buyer after completion.

Key Considerations and Tips

• Do Your Due Diligence: Before committing to buying or selling, thoroughly understand all the contracts and liabilities. It is wise to get professional advice from solicitors dealing with mergers and acquisitions as well as your accountants
• Negotiate the Terms: In some cases, you might be able to renegotiate the terms of existing contracts as part of the sale process.
• Seek Legal Assistance: Engaging with solicitors specialising in business sales can help you navigate the complexities and ensure you’re fully aware of all liabilities.

Final Thoughts

Buying or selling a business is a significant undertaking that requires careful consideration of all liabilities involved.

Sellers should engage with their solicitors and accountants early on in order to get the business ready for sale.

Buyers need to have a deep understanding of the business and the liabilities that it comes with. Sellers need to fully understand their potential liability under the sale agreement.

Specialist solicitors, such as those at Batt Broadbent, can help you conduct buyer or seller due diligence, including identifying liabilities and contracts that need addressing.

If you’re seeking a mergers and acquisitions solicitor, please give us a call on 01722 411 141.