What to Expect When Buying or Selling a Small Business (and How to Protect Your Money)

Whether you're buying or selling a small business, the process can be surprisingly complex. The business structure, payment terms, and legal agreements involved all play a significant role in how the transaction unfolds. Here's what to expect and some handy tips (not legal advice!) to help you navigate the process efficiently. If you need legal advice, feel free to contact us at team@helium.law.

1. Business Structure: Sole Trader vs. Limited Company

The business structure you’re buying or selling will dictate much of the process, so it’s essential to understand the implications.

• Sole Trader: A sole trader’s business is legally inseparable from its owner. This simplifies the transaction, as you’re mainly buying the business’s assets, such as equipment or stock. However, the risk for buyers is higher because debts and liabilities are tied to the owner personally. As a buyer, you must thoroughly investigate the seller's personal debts to ensure they won’t unexpectedly become your responsibility.
• Limited Company: A limited company is a separate legal entity, so buying or selling it can either involve purchasing shares or just the assets. A share purchase means you take on the entire company, including its liabilities. This makes due diligence critical—buyers need to carefully review the company’s financials to avoid taking on any hidden debts or legal problems. For sellers, the investigation will be more detailed, as buyers will scrutinise the company’s financial and legal history.

How to Save Money: Start by gathering all relevant information upfront. Ask for clear documentation from the buyer or seller, such as detailed financial records and proof of any debts or liabilities. Collect real documents rather than written or verbal assertions and keep everything organised, documented and well labelled. This reduces the amount of legal research and back-and-forth between your lawyer and the other party which saves a surprising amount of time and money.

2. Payment Terms: Ensuring You Get Paid Over Time

If the sale involves payments over a period of two or three years, it’s crucial to protect yourself, especially if the buyer runs into financial difficulties.

• Personal Guarantees: For sole trader sales, ask the buyer for a personal guarantee. This means that if the buyer defaults on the payments, their personal assets—like their home or savings—can be used to cover the debt.
• Security Interest: Whether you're selling a sole trader business or a limited company, you can request a security interest (also known as a “charge”) over the business’s assets. This gives you legal rights to reclaim certain assets, such as property or stock, if payments aren’t made.
• Escrow Account: Setting up an escrow account with a third party ensures that payments are securely held and released on agreed terms. If something goes wrong, the funds are protected in the escrow account.
• Charge on the Company: In limited company transactions, placing a formal charge on the company’s assets ensures you’ll be paid before other creditors if the company faces financial difficulties or goes into liquidation.

How to Save Money: Set clear and simple payment terms right from the start, and consider using affordable online escrow services rather than relying on your lawyer to manage these payments. This can help cut down on legal fees while keeping your financial interests secure.

3. Key Legal Agreements You’ll Need

To protect your interests and ensure the sale is legally sound, you’ll need a few key agreements depending on the business structure:

Corrected Section: Key Legal Agreements You’ll Need

To protect your interests and ensure the sale is legally sound, you’ll need a few key agreements depending on the business structure:

• Share Purchase Agreement (SPA): For limited companies, the SPA outlines the essential terms of the sale, including the purchase price, payment terms, and conditions. It’s used when the buyer is purchasing shares, typically taking over the entire company, including its assets and liabilities. The SPA includes key clauses for warranties, indemnities, and post-sale obligations. If the transaction involves the purchase of all or part of the company’s shares, this will usually be combined with or supported by a Share Transfer Agreement (STA), which formally transfers the ownership of shares from the seller to the buyer.
• Share Transfer Agreement (STA): This document is used specifically for transferring shares in a limited company. It works alongside the SPA to formalise the transfer of shares, confirming the legal ownership change. The STA is crucial in share sales to record the precise number of shares, the parties involved, and any additional conditions on the transfer.
• Asset Transfer Agreement (ATA): If you're dealing with a sole trader or if the buyer is only purchasing specific assets of a limited company, an Asset Transfer Agreement (ATA) is used. It details which assets are being transferred, any liabilities being assumed, and includes warranties regarding the condition of the assets. The ATA is common for businesses where only physical and operational assets, rather than ownership, are being sold.
• Assignment Agreements: there may be some existing contracts, for example, contractor/ freelancer agreements, that need to be assigned to the new business owner. The contracts would normally have a clause on assignment or change of control procedure. Depending on the provisions of the agreement and a form of the business acquisitions, necessary assignment / novation agreements would have to be executed.
• Non-Disclosure Agreement (NDA): An NDA protects sensitive information shared during negotiations. It ensures that trade secrets, financial information, and business strategies remain confidential, especially if the deal falls through.
• Personal Guarantee Agreement: If the sale involves deferred payments, especially for a sole trader sale, this agreement holds the buyer personally liable for any outstanding amounts if they default. It can be included in the SPA or ATA or drafted as a standalone document.
• Security Agreement: This sets up a charge or security interest over the business’s assets, giving the seller the right to claim certain assets if payments are not made. It's a useful tool for ensuring sellers are paid in deferred payment situations.
• Escrow Agreement: If payments are to be made over time, an Escrow Agreement provides terms for how funds will be held in a neutral account and released according to pre-set milestones or conditions, protecting both the buyer and the seller.

Trying to draft documents yourself, using a document you’ve used before or a cheap template library can seem like a smart way to save money but is more often a false economy. The quickest and cheapest approach is to start with a well maintained template library such LexisNexis or Practical Law. These are up to date, best practise templates that are familiar and quick to lawyers on both sides and save everyone a lot of time when drafting and negotiating agreements. This is why lawyers spend thousands every year to subscribe to them.

4. How to Save Money on Legal Fees

Legal fees can quickly add up, but there are several strategies to reduce these costs:

• Organise Documentation: Both buyers and sellers should have financial records, contracts, and other documents in order. Well-organised paperwork means your lawyer spends less time tracking down information and can focus on finalising the deal.
• Use Templates: For simpler agreements like NDAs or basic contracts, reliable templates are available online. You can customise these to suit your specific situation, which reduces the need for your lawyer to draft them from scratch.
• Communicate Clearly: Keep communication concise and organised to avoid unnecessary back-and-forth, which increases legal costs. If something isn’t clear, seek clarification early to avoid confusion that could lead to expensive revisions.
• Fixed-Rate Agreements: Instead of paying lawyers by the hour, consider negotiating a fixed-rate deal for key services, such as drafting the SPA or managing the escrow process. This provides clarity and control over legal expenses.

In Summary

When buying or selling a small business, understanding the legal requirements for different business structures is key to avoiding costly mistakes. Whether dealing with a sole trader or limited company, it's crucial to protect your interests—especially when it comes to payment terms and potential liabilities. Using tools like personal guarantees, security agreements, and escrow services can ensure you get paid and mitigate risks. Stay organised, communicate clearly, and be proactive in gathering documentation to keep legal fees under control while ensuring a smooth transaction.