Understanding contracts when buying or selling a business

Whether buying or selling a business, take time to plan it carefully. Take expert advice to assess the risks, set clear aims and a strategy for achieving them.

The first contracts you sign will be with a financial adviser for finance and tax advice and a solicitor for legal advice. Sellers are also likely to appoint a business transfer agent or business broker to approach possible buyers. You need to clearly define tasks and fee structures. For more information, see choose a solicitor for your business and choose an accountant for your business.

Confidentiality or non-disclosure agreement

The seller's solicitor will draw up a legally-binding confidentiality or non-disclosure agreement to be signed by all prospective buyers before they receive the sales memorandum. A business broker or corporate finance adviser will often also do this.

Sales memorandum

In the sales memorandum, which is not legally binding, the seller gives details of

• the business sector
• how long the business has been trading
• main financial details, eg profit, cashflow, asset value, total debt
• number, age, length of service, job descriptions and details of salaries and benefits of all staff
• location of premises, size, rent and rates, freehold or leasehold (with terms) special considerations (eg special licenses)
• the structure of the sale, eg is the sale of part or all of the business

Purchase offers

Ideally, all purchase offers should be made in writing. Any initial verbal purchase offer should be followed up with a letter setting out the main details and stating prominently that the offer is "subject to contract", in other words, not legally binding.

The offer should include details of:

• what the buyer is offering to purchase, eg the business or its assets
• the offer price and payment terms
• the main information required by the buyer before a firm offer will be made, eg whether leases, licences and client contracts are transferable, liabilities for employees, etc

At this stage, the seller compares offers and selects a buyer. It is the seller's responsibility to check the credit-worthiness of prospective buyers and that the buyer can raise the funds to buy the business. The buyer then needs to start checking the business - this is called preliminary due diligence. Due diligence should not be started until lawyers have been instructed and a firm purchase offer has been agreed and signed.