Sale of a business

What it means

A sale of business transfers the whole undertaking or an independent part of it under one contract: assets, rights, liabilities, contracts and staff. The buyer takes over the operation, not ownership of the company.

That distinguishes it from selling an ownership interest, where the owner changes but the company itself, with all its contracts and history, remains.

It differs from selling individual items in that the subject is a working whole. If a company sells only machines and inventory without contracts, staff and customers, that is not a sale of business but a series of ordinary sales. Nothing then passes to the buyer automatically, and every liability or employment relationship is dealt with separately.

How it works in practice

Employment rights and duties pass to the buyer by law. Employees must be informed in advance and the transfer discussed with their representatives where any exist.

The difference between price and the net assets taken over becomes goodwill for the buyer. The price comes from a valuation and is adjusted by due diligence.

For VAT, the sale of a business or part of one is, under the statutory conditions, not a supply of goods or services, so no output VAT is charged. We check those conditions before the contract is signed, because if they are not met each item and service is taxed separately and the buyer’s input VAT deduction becomes contestable.

What to watch out for

Not every contract passes automatically: leases, licences and loans often need the counterparty’s consent. Without it the buyer takes over an operation with no premises, or without the software that runs it.

The seller is not fully rid of the debts it hands over: by law it remains a guarantor of the liabilities that passed to the buyer. If the buyer does not pay, creditors turn to the original company, so it pays to settle as much as possible before the transfer or to ask the buyer for security.