This is part of a two-part guide that attempts to provide a brief outline of the procedure that is involved with buying a business. In this article, we will take a closer look at the elements of the apportionment of the purchase price in the Business Sale Agreement.
The purchase price for a TOGC is often apportioned as follows:
Â -Â Property
Â -Â Goodwill
Â -Â Level of creditors and debtors
Â -Â Stock-in-trade.
We will now take a look at each of the above in more detail.
If the property occupied by the business has any specific value, then a premium will be charged for this.
Where the property is a freehold, the seller may choose to sell the property as part of the TOGC, or may want to lease the premises. Where the latter is the case, then the lawyers will need to draft a new lease, whereby the seller will become the landlord and the purchaser the tenant. The specific terms of the lease will need to be negotiated between the seller and the purchaser, as with any typical lease transaction.
Where the property is leasehold, consent will need to be sought from the landlord. A Licence to Assign and Deed of Assignment will need to be drafted by the lawyers. The Licence will be granted by the landlord giving consent for the seller (tenant/assignor) to transfer the lease to the purchaser (assignee).
Purchasers need to be aware of any restrictive covenants that affect a leasehold property. Restrictive covenants are obligations which must not be done, such as not to use the premises for the sale of alcohol.
This is the value of an entity over and above the value of its assets, and it includes the value of the reputation of the business, and the brand or brands owned by the business. Intellectual Property rights owned by the business are also under this head, such as any copyrights, design rights, patents, and trademarks.
Debtors and Creditors
It is important to value the level of debtors of the business. Similarly, the creditors will also need to be accounted for, to evaluate the liabilities of the business. It is recommended that purchasers use an accountant to deal with this aspect.
The value of the stock-in-trade of the business should be valued by an expert valuer, who is jointly appointed by the seller and purchaser (to avoid any disputes). Due to the nature of this element, and being a TOGC, it is determined close to the completion of the sale as the seller is expected to carry on trading normally right up to completion.
This is a very important element of any TOGC, as employees are protected by numerous statutory rules and regulations which are generally referred to as the ‘TUPE’ regulationsÂ (Transfer of Undertakings for the Protection of Employees). These are designed to protect employees of a business from losing their jobs, and a purchaser of the business cannot therefore dismiss an employee without having a good reason for doing so.
Any accrued benefits of employees will also need to be taken into account in the Business Sale Agreement, including holiday pay for holidays not yet taken by the employees. Staff on maternity and paternity leave, and any on sick leave will also need to considered.Â
If you would like assistance with buying or selling a business, then please contact our Commercial Department and speak to one of our solicitors who will be happy to discuss this with you.