Asset Purchase – The Legal Formalities

It is usually the responsibility of the buyer’s solicitor to draft the Agreement.

It is imperative that the Agreement identifies what exactly is being purchased by the buyer. A schedule should be compiled as to what assets are to be included in the sale and what assets are to be specifically excluded.

 An Asset Purchase Agreement often includes:

•  Stock

It is essential that at least a valuation is made on the amount of stock which is held by the business. If a valuation is calculated this figure can be amended on completion upon an investigation on what stock the business is actually holding.

•  Goodwill

Goodwill is the figure which is attributed to the reputation held by a business with its suppliers, customers and potential customers. The buyer will usually require a clause stating that the goodwill is to be protected by the seller until completion.

•  Employees – What is TUPE?

The Transfer of Undertakings (Protection of Employment) Regulations (“TUPE”) is the name of the Regulations which protect employees’ rights on the transfer of the assets of a business.Both parties have a duty to inform and discuss with those employees who may be affected by TUPE and about the process, that their employment will be deemed to automatically transfer to the buyer on completion with their existing terms of employment and their statutory rights.

• Plant and Machinery

It is imperative that an up-to date list of all plant and machinery to be transferred is kept by the parties; this should also include all hire purchase or lease agreements.

•  Contracts

Every business has a range of contracts. This can be a complex area to check. Provisions will have to be included to deal with the liabilities under the contracts that are being taken over. Often, third parties, with existing contracts with the seller, will have to consent to the transfer of contracts to a buyer. The parties will have to consider what will happen if the third party refuses to give consent.

• Premises

There will need to be a formal transfer document in relation to the premises.

• Leasehold

If the property is a Leasehold property this tends to make the process slightly more complicated due to the landlord’s consent being required in the form of a transfer or assignment. This can be costly to the buyer and also time consuming.

•  Intellectual Property

Formal assignments of the sellers IP rights may be appropriate. It is crucial that the register of trademarks, patents and registered designs is updated to reflect the change in ownership.

•  Creditors

The way the Agreement will deal with creditors depends greatly on whether the buyer is to take over the liabilities incurred by the seller post completion. If not, the buyer will require the seller to settle all liabilities with creditors, as it is likely that the creditors will be continued suppliers of the business.

• Debtors

Like debtors, it is up to the buyer whether he would like the control to be retained by the seller or passed to him on completion. Often the buyer would prefer to take control of the creditors and the debtors so as not to damage the goodwill of the business.

• Warranties

Warranties about the business are given by the seller.

• VAT

If the business is purchased as a “going concern”, then VAT will not usually apply as long as both parties are VAT registered.

Completion

After the documentation has been finalised then the Agreement and other ancillary documents can be signed.

If there are pre-conditions to completion, then it is normal to have a period between exchange of contracts and completion. Usually, however, exchange and completion is simultaneous.

Completion Agenda

There are usually practical issues that a buyer has to sort out at completion like (for an asset purchase) VAT registration, payroll, PAYE and National Insurance, and buildings and contents insurance. A completion agenda will be prepared and used as a checklist by the buyer to ensure that he completes all of these obligations.

For a share purchase, detailed board minutes dealing with the share transfer will be required.

The above guide courtesy of the corporate law department of Darlingtons Solicitors.