Why does the purchase of a bed and breakfast property require a specialist? Most importantly, it constitutes the purchase of a business: it is not just a house conveyance.
Purchasing the business
The business may be held in the name of a company for tax efficiency reasons, whereas the bricks and mortar may be in individual names. Both business and property need to be purchased and both the company and the individuals need to be made parties to the Contract.
The business will comprise a number of assets. There will be fixtures, contents and equipment and, ideally, warranties need to be included in the Contract: these are to ensure that there are remedies against the seller if any of these are not of sound quality and in working order at completion.
There will be the Intellectual Property, namely the IT system, website and membership of online customer booking systems such as Innstyle.
There may be staff whose contracts will generally pass with the business under the TUPE regulations (Transfer of Undertakings Protection of Employment).
These staff contracts will need to be checked so that the buyer is fully aware of all the obligations they are taking on, as there is no real opportunity to change them as part of the business sale.
There may also be liabilities, e.g. potential claims which are made after the date of purchase but which relate to activity before sale. These need to be addressed and appropriate indemnities given by the Seller, or monies retained from the purchase price, pending resolution if the issues are sufficiently serious.
There may be ongoing contracts e.g. hire or hire purchase agreements relating to coffee machines, kitchen equipment etc. The wording of these contracts will need to be considered to ascertain if they are too onerous and if so can they easily be terminated with no penalties.
There will be some goodwill. This is defined as “the established reputation of a business regarded as a quantifiable asset and calculated as part of its value when it is sold”. The sale contract will need to contain appropriate non-compete clauses to protect this goodwill going forwards. The buyer will not want the seller to set up close by and pinch the custom.
Puchasing the property
The land/building is just one element of the transaction but, of course, extremely important.
Burnetts conducts a comprehensive due diligence process in the same way as with any property, including full searches, property enquiries, title report etc.
There are a number of statutory requirements which will need to be checked out. The property must hold a valid Energy Performance Certificate (EPC) of no lower than level E. There must be up to date Electrical Installation, Emergency Lighting and Gas Safety Certificates. Individual electrical appliances must have up to date PAT Testing Certificates.
The property must comply with all current fire regulations. Ideally there should be a current Asbestos Report. It goes without saying that the buyer should have a full structural survey before buying.
Searches need to be done as with a house purchase. Further questions need to be asked of the Local Authority to ensure that the correct planning permissions exist for the type of business that it being carried out. There may be issues with food hygiene safety and these will be revealed on a search.
The buyer may be looking to fund the purchase through a mortgage and the lenders will have a fairly comprehensive report on title which needs completion, generally by the buyer’s solicitor.
Once all of the due diligence has been satisfactorily completed, the contract for the purchase has to be negotiated. Any issues which have arisen through the search and enquiry process will need to be covered off in the contract by way of warranties/indemnity to give the buyer as much protection as possible. Forward bookings and deposits will need to be dealt with in the contract. There may be tax issues, VAT or potential unclaimed capital allowances on which the accountant will advise. The Buyer will also need advice as to the best position from a tax perspective in terms of apportionment of the price as between, the property, the goodwill and the fixtures, contents and equipment
As solicitors we can advise buyers or sellers on all aspects of the above, but there is no doubt that the purchase of a bed and breakfast business is not to be undertaken lightly. It requires a lot of hard work and onward investment to make it succeed. We are here to ensure that the Buyer is in the best possible position to take advantage of the opportunities which there are to grow the business and that all liabilities have been flushed out, which, if hidden, might arise to derail that process.
For more information on the purchasing of bed and breakfast properties, contact Susan Scott here.