Buying A Business – The Heads of Terms – Part I

This two-part guide attempts to provide a brief outline of the terms that should be considered, negotiated and included in the Business Heads of Terms when buying a business.

The ‘Business Heads of Terms’ is effectively an agreement that sets out the main terms of the business sale. It is also often referred to as the ‘Heads of Agreement’.

The following terms should be negotiated and listed in the Business Heads of Terms:

The subject of the Sale

This could be the business, or its assets.

There are advantages and disadvantages for each of these, but generally speaking, purchasing specific assets of the business will help the purchaser avoid potential legal liabilities of the business. For example, this could include a legal action based on a contract a third party has with the business.

Assets of the business include its equipment, vehicles, stock-in-trade, debtors and orderbooks, the property it occupies (leasehold or freehold), and the staff.

The Price and Payment Structure

Generally speaking, payment of the sale price can be as simple or as complex as the parties want to agree.

Businesses sale valuations are partly based on the profitability of the business, and therefore, the value could be dependent on the success of the business up to the date of completion. Ideally, the purchaser should only rely on the audited accounts of the business, as these are prepared by a chartered accountant who carries out a detailed inspection of the accounts.

It really depends on the business in question, and the purchaser’s own intentions, but where the sale price of the business is tied to the profit figures in the next set of audited accounts, then it may be necessary to agree a part-deferred payment of the sale price.

Deferred payments can be advantageous to both parties:

– the purchaser could finance the purchase of the business by funds generated by the business itself

– the price could be set to correlate with the performance of the business, so if the profits fall, then the sale price falls, and vice versa

-Â there could be tax advantages for the seller, in that capital gains tax on the sale of the business could be spread over more than one tax year

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.

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