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Buying a business: transfer of undertakings & retaining goodwill post-sale

Interview with...

Ritu Sethi, senior partner, Sethi Partnership Solicitors
Topics covered:
Selling a business, business sales contracts, how lawyerss can help with business sales
consulting for sellers and buyers
Middlesex, England

Ritu Sethi o n pitfalls when buying...

"It's when a client has not been advised properly by a lawyer, especially on auction properties, when they just go in and decide that they're going to buy a business without doing their due diligence. And then they get stuck, either because they can't raise finance or there's some clause in the covenants of the contract which they haven't read.

"This sometimes leads to lengthy litigation in the High Court, because it is a really expensive and long process to put right what they haven't checked with a lawyer before they go into any kind of contracts.

"The other pitfalls could be under the transfer of undertakings, where you're buying a business with employees, and they haven't done their due diligence on the employees so they don't know the redundancy situations. They end up having to pay so much just to get the business into shape as to what it is they want to do."

On her advice to buyers...

"Having the vendor still working in the company for a period of time, and it can be an agreed period of time, whether it's three months or two years, transferring the goodwill of the company, especially if the business owner is the business - if he's the reason people do business with that particular company.

A tip for business sellers is to make sure that they pitch their price at the right level, because there are a lot of buyers looking and they're all looking for good value

"To have him there still on an ongoing relationship is a smaller transition, and also that way you don't feel that your new custom will go elsewhere, thinking that the owner or the management has changed.

"So what we would do is sit with all parties and negotiate terms and conditions so that it's fair for everyone, so the previous owner won't be taking the business with him.

"The other thing to look out for is a restrictive covenant clause, so that even if he does move elsewhere, he doesn't go and set up a competing business next door, so that the business you've just bought depreciates in value."

On her advice to sellers...

"With sellers at the moment it really is a buyer's market and as far as sellers are concerned, there are so many businesses for sale  not necessarily because they're not doing well, but it could be that someone has just decided to retire or to move country, as we've found with clients.

"So a tip for sellers is to make sure that they pitch it at the right level, because there are a lot of buyers looking, and they're all looking for good value. So pitch your business at the right value, and the way to do that is to see what the going rate is for other businesses of equal stature.

" Also, advertise your business with as many agencies as possible. Agents often say that if you're with too many people, it looks like you're desperate to sell, but my view is, if you're with too many people, someone will know that your business is for sale. "

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