Small businesses are generally defined as family businesses or businesses which are owned and managed by a single individual or by a small group of people. Rupert Wright, corporate services lawyer with Charles Lucas & Marshall, provides some pointers for buyers and sellers.
Due Diligence. The small business may not have the time or resources to do a detailed due diligence exercise into the business it is buying. In practice, an accountant often needs to be involved to check accounting issues. However, the due diligence process includes checking supply contracts, the existence of litigation or disputes and employee issues.
Tax issues. Stamp Duty and VAT will need to be checked. In particular, VAT is not charged on assets sold as part of the transfer of a going concern. However, both the seller and the buyer must be registered for VAT purposes.
Stock and work-in-progress. Both parties must agree the value of the stock. The simplest course of action is for the parties to agree on an expert valuer to carry out the stock valuation. The most usual formula is for the valuation to be at the lower of cost and net realisable value.
Business Contracts. The parties need to consider what action needs to be taken to transfer business contracts to the buyer. To the extent that the buyer wants to have the benefit of a contract, this can be assigned to him by the seller. The ideal solution for the seller is to seek to have contracts novated.
Computer Contracts. Most small businesses are dependent on computers for their day to day operation. Computer hardware is frequently leased rather than acquired outright. Software can also pose contractual issues which need to be dealt with. Also, the transfer of the rights in a website to the buyer need to be considered.
Restrictive covenants. The buyer normally needs to have a restrictive covenant to prevent the seller opening a competing business or poaching valuable customers or staff. The timescales for such restrictive covenants would need to be considered and generally two years is a sensible time period.
Employee rights. The rights of employees are governed by the TUPE rules which provide that Contracts of Employment of employees are automatically transferred to the buyer.
Warranties and Vendor protection. The buyer should seek reasonable warranties from the seller. Sellers should ensure that they have protection from potential claims, particularly as to the amount that can be claimed. Also, buyers should seek specific indemnities on key matters.
In summary, it is essential for both sellers and buyers of small businesses to involve a specialist business lawyer to assist with the asset purchase agreement required.
For further information contact Rupert Wright on 01635 521212 or firstname.lastname@example.org
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