Buying a business can be a shortcut to profit and growth, taking something already proven successful and making it better. However, when purchasing a business in Scotland, you should be aware of the legal considerations involved to ensure a smooth and compliant transaction. These encompass everything from due diligence and contracts to employment law, intellectual property rights, and regulatory obligations.

Let’s examine these aspects in more detail.

Due diligence

The process of due diligence is critical in any business acquisition. It involves thoroughly investigating the business you intend to buy to ensure it is both legally and financially sound. In Scotland, this can cover several areas.

Firstly, there are the financial records. You should review the company’s accounts, tax filings, and profit/loss statements. Doing so helps clarify if the business is financially stable and there are no hidden liabilities. Secondly, check whether the business complies with relevant Scottish and UK laws, such as corporate governance requirements, regulatory obligations, and health and safety regulations.

If all this is in order, assess any ongoing contracts and agreements the business has with suppliers, clients, or third parties to ensure they will remain enforceable after the sale. Similarly, investigate whether the business is involved in any current or pending legal disputes, as these could potentially impact its value or reputation.

Failure to conduct thorough due diligence can lead to unexpected liabilities or legal challenges after the purchase is completed.

Asset vs share purchase

When buying a business, the transaction typically takes one of two forms: An asset purchase or a share purchase. Each has different legal implications.

In an asset purchase, you buy individual assets of the business, such as property, equipment, or intellectual property rights. One benefit of this approach is that you can select which assets and liabilities to acquire, allowing you to avoid unwanted debts. However, you may need to renegotiate contracts with suppliers and customers, as the legal entity remains with the seller.

Alternatively, in a share purchase, you acquire the shares of the company, taking ownership of the entire legal entity, including its liabilities. This can be a simpler way to transfer ownership, since contracts and employment arrangements remain intact. However, you assume responsibility for all historical liabilities of the company, so thorough due diligence is paramount.

The choice between an asset purchase and a share purchase depends on factors such as the type of business, tax considerations, and risk tolerance.

Contracts and agreements

The legal contracts involved in purchasing a business in Scotland are vital to protecting your interests. The two primary agreements are:

  1. Heads of Terms

This document outlines the main terms of the business sale. Although not legally binding, it serves as a roadmap for the formal agreement. It sets out the purchase price, payment terms, and what is included in the sale (e.g. assets and intellectual property).

Sale and Purchase Agreement (SPA)

This is the legally binding contract finalising the terms of the business sale. It includes detailed provisions such as warranties and indemnities. The former are assurances made by the seller about the condition of the business. If these prove to be false, you may be able to claim compensation. Indemnities, on the other hand, provide protection from specific risks, such as unpaid taxes.

The SPA also includes the completion accounts used to determine the final purchase price after completion, adjusting for working capital, debt, and cash flow. The agreement may also include clauses preventing the seller from competing with the business after the sale or poaching key employees.

Carefully drafting and reviewing these agreements with a solicitor ensures your interests are adequately protected.

Employment law

If the business you’re buying has employees, then employment law is a significant factor. The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) apply when buying a business as a going concern. TUPE protects employees’ rights by automatically transferring their employment contracts, including their terms and conditions, to the new owner.

Key points under TUPE include the obligation to inform and consult with employees or their representatives about the transfer. Then there is also the continuity of employment contracts, meaning you must maintain employees’ existing terms and conditions (such as salaries and pension rights). Finally, any changes to employees’ contracts after the transfer must be justifiable and not solely for the purpose of the transfer.

Understanding your responsibilities under TUPE is vital to avoid any disputes or claims of unfair dismissal.

Intellectual property rights

If the business owns intellectual property (IP), such as trademarks, patents, or copyrights, it is crucial to make sure these rights are properly transferred to you. Such transfer of IP rights must be explicitly included in the sale agreement. Furthermore, you should ensure there are no third-party claims on the business’s IP, which could undermine its value.

In addition, if the business licenses any IP from third parties, these agreements must also be reviewed to ensure they remain valid after the sale.

Regulatory compliance

The business you’re purchasing may be subject to various regulatory obligations, depending on its sector. For example, companies operating in industries such as financial services, healthcare, or food production will need to comply with specific Scottish and UK regulations. You must verify whether the business holds all the necessary licenses, certifications and permits – and whether these can be transferred, or will need to be reapplied for after the sale.

Any non-compliance with such regulatory requirements can lead to fines, reputational damage, or even the suspension of business activities.

Tax implications

The tax implications when buying a business vary depending on whether you’re purchasing shares or assets. In an asset purchase, capital gains tax and VAT may be applicable. However, in a share purchase, stamp duty on shares is also a consideration. Additionally, structuring the deal in a tax-efficient manner is crucial, while seeking advice from a tax advisor is often recommended.

Financing the purchase

If you are financing the purchase of the business through loans or external investment, your financing agreements need to be aligned with the terms of the sale. Also be aware that lenders may require security over the assets or shares of the business, which should be factored into the transaction.

Cross-border implications

One final thing to be aware of is, if the business operates internationally, you must consider the cross-border legal implications. These include foreign tax obligations, contracts governed by foreign law, and potential currency exchange risks.

So, buying a business in Scotland involves numerous legal considerations requiring careful attention to detail. From due diligence and contract negotiation to employment law and intellectual property, each aspect of the purchase must be thoroughly reviewed to avoid legal pitfalls.

 

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John Roberts is a Partner and Director at Austin Lafferty Solicitors. John has been with the firm for almost 20 years, with experience in all areas of business law.