Legal Costs for Buying a Business

[mattymoo]

Hi all

I could do with some help on the expected legal costs of buying a business.

My husband and I are buying a business (the shares) for circa £700-£750k. I've rung a couple of local solicitors and have been quoted £10-15k by one and £2-2.5k by another!

Clearly there is a big disparity there and I don't know whether the one is
extortionately expensive or the other ridculously cheap and potentially not going to cover all that is needed thoroughly?

I understand we need:

Heads of Terms
Exclusivity agreement
Due diligence undertaken
SPA completed
Warranties
Disclosure process

Can anyone give me a steer on what we should expect the costs to be? The business comprises of mainly stock (£450k), 5 employees and 2 leases (office and warehouse)

Also is there any part of it we can do ourselves rather than use a solicitor such as the due diligence process? We already run a successful business so are fairly switched on to what we would need to look at? We have an accountant who has looked at the books.

Any help would be appreciated

 

[Williams lester]

I would be very surprised to be abole to get the sort of service you need for under £10k....but you never know. Have you asked the cheaper solicitor if they have experience with this sort of work? Whether they can provide a reference from another client they have done similar work for??

 

[saxondale]

I would be very surprised to be abole to get the sort of service you need for under £10k....but you never know. Have you asked the cheaper solicitor if they have experience with this sort of work? Whether they can provide a reference from another client they have done similar work for??

but also ask the same questions to the most expensive ...............

 

[Ray_Stewart]

Also try a 3rd Solicitor as well - Insurers generally ask for 3 quotes so why not you?

 

[mattymoo]

Thank you for your repsonses. I will get another quote. I did wonder whether the 2nd one had much experience of business purchases as he seemed to be focusing on whose name the lease was in for the warehouse!

It's really difficult to assess whether you are getting value for money. I would rather go with a recommendation but don'y know too many other people locally that have gone through a similar process

 

[Tej]

Thank you for your repsonses. I will get another quote. I did wonder whether the 2nd one had much experience of business purchases as he seemed to be focusing on whose name the lease was in for the warehouse!

It's really difficult to assess whether you are getting value for money. I would rather go with a recommendation but don'y know too many other people locally that have gone through a similar process

Would not imagine a lot of people have £750k to invest... and not know a firm of solicitors.. particularly having an already running successful business.

just wondering...

 

[mattymoo]

Well Tej as you were 'wondering' we built our existing business from scratch over an 11 year period and luckily have never needed legal advice apart from HR support and we employ a specialist company on a retainer for that.

 

[Tej]

Well Tej as you were 'wondering' we built our existing business from scratch over an 11 year period and luckily have never needed legal advice apart from HR support and we employ a specialist company on a retainer for that.

Thats excellent... right way to run a successful business I guess.

If you are spending £750k to buy a business.. would it not be worthwhile to spend 10k/15k on the legal stuff to ensure that all is done properly? ( Not a lot of money in the grand scheme of things)

Peace of mind is worth a lot in the long run. IMO

Its possible to negotiate with the vendors to contribute towards the fees. If they are desperate enough for a quick sale, they might even stump up the whole lot. Its in their interest too, to get all the paperworkl right.

just an idea...

 

[legaltemplates.eu]

You get what you pay for springs to mind, but maybe you should call a few other commercial solicitors and to find the average in costs.

 

[Free Lance]

£2 - £2.5k and you already get a bad feeling about their experience. Too right. No way on earth can it be done for that. Move on from that quote.

Buying shares comes with so many more risks for the buyer than buying the business and assets. As I'm sure you know, the company you are buying comes with all the good things in it and all the bad too. (The bad things will not directly wash through to you as purchasers so your financial liabilities will be limited to the amount you pay for the company but the time spent it sorting out problems can have a direct effect on you as purchaser).

You need a decent set of lawyers who know what they are doing. They can actually add value by, for example, helping structure the payment of consideration. For a share sale it is not unusual to pay the majority of cash upfront then defer paying the balance until completion accounts have been finalised and/or known issues dealt with.

The balance is between value and expertise. Ironically, if you go too far up the scale you will probably get bad value and bad service because you will be handled by a very junior lawyer who will not know on what points to compromise, etc.

Decent solicitors who do share purchases will almost certainly have details of recent transactions they have dealt with on their website and/or in the profiles of their lawyers. Check those out. (They sometimes refer to them as tombstones - little details of deals in a tombstone format!)

You are also in a good place because corporate departments are struggling at the moment, especially the mid-tier firms that you need to be looking at. You can negotiate hard on things like capped fees, contingent fees (what if you back out £10k into the deal - nice to know that you would only have to pay, say, 50% of fees incurred).

You can save costs by doing your own due diligence to an extent. Getting a full report from your lawyers on the due diligence they perform is probably overkill and that alone would add £5k to your bill at least. However, getting the sellers to respond to a fairly standard due diligence questionnaire from your lawyers should not be expensive. You can ask your lawyers to look at certain aspects of the information revealed (property or important contracts for example). That limited due diligence gets the best value for money for sub-£1m transactions. But you need to be sure that the sellers back up what they tell you with decent warranties (and have the resources to pay up if it goes wrong - hence the reason to withhold some initial consideration perhaps).

I would be more than happy to look at your shortlist of lawyers. I can also make a suggestion or two of my own. Please PM me and I will get in contact.

Good luck

 

[jim_price]

Some excellent advice from Free Lance there. You need a law firm that has a number of transactions under their belt, a quote of £2K suggests that they might not know what's involved. That said, £10K - £15K sounds a little steep for the transaction you have outlined.

If you can state your location - PM me if you prefer - I might be able to make a recommendation.

One cautionary note if I may, when you say your accountant has looked at the books - is this a euphamism for a financial due diligence assignment or have they just looked at historic data? You should of course be focussed on what will happen to the company, as opposed to what has happened. Stock looks like a vital area, not sure what sector it's in, but have you got comfortable with the ownership, risk of obsolescence, saleability etc

 

[oldeagleeye]

I can reccomend a solicitor who is an expert in commercial business & property tranactions and while fees are not cheap you can expect a first class service from a plain speaking professional who is a partner in the firm.

He is also open to agreeing a budget and so there are no surprises.

The guys name and his is a member of the forum is Richard Shepherd of James & George Collie & Co. Tel 01224 563344

As said top class man . The only downside is he is a Chelsea supporter

Robert

 

[Homshaw]

If you are buying the shares, and I would be very reluctant to do so, as opposed to the assets there are so many area to cover and assurances to be made that quality is more important than the cost.

There is a good book on the Tax Cafe website about the tax implications of selling a business but it does list the areas that should be covered in any sale agreement. might be the best £20 you could spend

 

[mattymoo]

Thank you all for your replies. It is a bit of a minefield. We have our next meeting with the buisness owner next week where we will be looking at the next level of detail including how the payments are staggered. We've already agreed it in principle.

Our accountant has so far only looked at the books historically but is happy that I have enough experience of my own to carry out the financial due diligence whilst using him as an exception.

We've also agreed that it will be a share purchase due to the existing contracts that are in place.

 

[The Resolver]

Some tips on being a wise client:-

1. Go to companieshouse.gov.uk and download latest filed documents
2. Undertake a credit search on both the company and the directors
3. Google the company and the directors for any relevant information that may arise and which may give a steer on due diligence or required terms or post completion restrictions (eg dissatisfied customers, suppliers, franchisees/dealers/agents threatened litigation)
4. Buy a template business acquisition contract relevant to the nature of your proposed transaction (I can show you where and give you a steer on selection eg netlawman.co.uk) complete with instructions. Don't worry about the cost -only modest anyway and it will be worth it in the fee negotiation later.
5. Prepare an Invitation to Quote containing:-
   
   a) a full description in three paragraphs of the business you wish to buy - nature of the business, what it sells, what it does to sell it etc- with overview of classes/numbers of suppliers and customers, employees, contractors etc

b) details of the company structure (obtain and forward latest documents filed at companies house) plus latest accounts, both filed and management and credit search results.

c) a brief overview of the classes of items – leases (and whether registered or not), required licences if any, intellectual property (websites, domain names, trademarks, software, know-how etc), dealerships/distribution agreements etc Obtain copies of the Leases


d) list of key terms such as post sale restrictions on selling shareholders


d) list of representations made by the sellers that have encouraged your decision to purchase


e) anything specific you wish to focus on in due diligence that is significant to your decision.


f) the template document you acquired


g) details of anticipated completion date.


h) any steps required post completion , eg shareholder agreement

1. Locate say 6 firms in the nearest large town to the business and ignore London, Leeds, Manchester where fees generally are unreasonably and unnecessarily high. If Manchester is where the business is based choose say Bury or even Chester. Check their websites and ensure they do both small business acquisitions (and gives the name of a senior (not junior nor 'salaried partners' who are not strictly partners) equity partner undertaking it PLUS conveyancing or crime. These latter two are important . Reason is that firms doing such work have had their revenues slashed and will be trying to expand other areas of work and thus be very keen to take on a company /business/lease purchase which may lead to further work for the business. Ring up that partner and insist on only speaking to him. Ask if he is prepared to provide a fixed quote and explain:-
   a) you will give very detailed pre-information
   b) you are looking for a firm who can also act for the business in future.
   c) that you are on a strict budget and will be seeking 6 quotes.
   d) that in turn you will be prepared to reduce the work they do to the strictly legal that can only be best done by a solicitor.
   e) that , apart from a first meeting, you are content to take up no time in their office and will be happy to communicate online throughout the process.
   f) also state that,whilst you want a senior equity partner to take direct responsibility for your matter, and provide any advice on compolex issues, you are content for most of the standard work to be undertaken by junior staff. In this way you are gaining the benefit of the senior partner's keenness for new quality business whilst not requiring his expensive hourly rate.
   
   g) show them the template and say you want them to quote just for adapting it not for drafting a new one from scratch. If they have their own template then obviously that is fine but the point you are making is that you do not want to pay for drafting from scratch . Templates from the right source are fine and save a huge amount of professional time when used by a solicitor. You are trying here to avoid being charged for a 30 page document which sounds very time consuming when either it is unnecessary or they actually use a template anyway.
   
   3. Email to the shortlist and ask to quote setting out a breakdown of what items of work they intend to do and what level of fee earner will undertake each task.

1. When receive quotes, consider which of the listed tasks you feel competent to do yourself or which some other person at lower cost could do ( I have worked on business acquisition with sole practitioner accountants who are more competent in business assessment than many lawyers and charge a fraction of the cost) . Email back to each one listing those items you feel you can do or have done by others and asking them if they are prepared to do the rest in liaison. Most of the work does not require a solicitor.
2. Finally, ask each of them if their quote is their final offer or whether they can reduce. If they are not the lowest , give them the lowest and ask if they can beat it.

The above is the future for legal service purchase,or the 'commoditisation of the law' as identified by the IT advisor to the Lord Chief Justice (Professor Richard Susskind ) in his book 'The End of Lawyers? Rethinking the nature of legal services “.

 

[Free Lance]

Graham is a great contributor to the board but I disagree about some points.

Strongly agree about getting various quotes, shopping around, setting parameters, etc. (points a - e)

A share purchase for 0.75m is not a small business acquisition. It's a share purchase. Small business acquisitions are typically leasehold shops which come with an small business. What you have in mind is something different.

I don't think Graham is saying find a lawyer who specialises in all three areas of corporate, conveyancing and crime but a law firm that does. This is where we differ. As a general rule if a law firm does criminal and conveyancing work then it is a high street firm which does not specialise in corporate transactions. Corporate departments in mid sized regional firms are equally hard hit and will do deals on fees. You would be advised to find a firm whichhas a department that specialises in "corporate" matters as they will have the expertise to do the job most efficiently and will know the tricks of the trade. They are likely to be more expensive but you get what you pay for. It is not just about box ticking - the lawyers are there to add value (believe it or not) by flushing out problems early on and protecting you so far as possible from problems that come to you attention after the deal is done - getting the shares transferred is the easiest bit of the whole transaction.

All firms will shove the matter down to the lowest level of lawyer to do the work and they will all say it is supervised by a senior partner. It works sometimes but often you get the worst of both worlds, not the best. An inexperienced junior taking 3x as long to do the job then a senior lawyer reviewing their work and delaying the process. Junior lawyers are also more risk averse and find it difficult to take a commerical/practical view of the transaction as a whole. This often leads to them raising issues unnecesarily, or fighting over them with the lawyer on the other side in a manner which is unreasonable and time-consuming. I would want to find someone who his experienced (who may be a partner but may not) who will be doing 75% of your work and will be the day to day contact. They will draw on seniors for expertise and juniors for mundane tasks.

Finally, yes, do research and find Share Purchase Agreements (not business acquisition agreements - similar but very different in some respects) to structure a clear heads of agreement with your sellers. Get into detail as much as possible. However, I cannot disagree more strongly that you should present the solicitors with you own document for the solicitors to edit. Any half- decent firm will have a good precedent document and it will be quicker, easier and better for them and you for them to use that as the basis of the agreement, not least because they should have used that dozens of times before, have 'know-how' meetings about it, have documents supporting it, etc. It is a false economy: it takes literally 2 or 3 times longer to review and edit an unknown document than to input the relevant details into a document which is well known to the drafter.

Good luck.

 

[The Resolver]

All fair comment. I was not suggesting a firm that does all three. I said 'PLUS conveyancing or crime' . I was using the phrase 'business acquisition contract' just to decsribe loosely what it is. Fact that what is actually bought is the shares doesn't change what is being bought in layman's terms. Yes many firms use templates but my point is they may not say so. I was suggesting flushing it out either openly by them declaring it or simply by encouragng a reduction in the fee. Your points about the value of the lawyers advice overall are very true and well put. My point, if you want to reduce fees, is to focus on paying for that advice and professional skill and not much more.