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Buying a business

Buying a business: are you getting shares or asset?

| Published on February 25, 2019

When you have an established business the opportunity to purchase a competing or complimentary business provides one route to expansion. But it is essential to be clear on what exactly you are acquiring: either the business (its assets, goodwill, continuing contracts and employees) or the shares of the company through which the business trades.

The Seller will usually try to dictate which route to take. Obviously, only the owners of a company can offer to sell shares. A partnership or sole trader will sell the business assets. But a company can offer to sell part of its business. The transactions to acquire assets or shares have certain similarities. However, there are considerable differences and consequences of choosing one route over the other.

Share purchase

Although directors run the business of a company on a day-to-day basis, control vests in the owners of its shares. When acquiring shares, a key question will be whether you are acquiring all or just some of the issued shares. If only some, then what level of control will that give you? Are there different classes of shares with different rights attaching to them? You might buy 99% of the issued shares in a company, but what if the holder of the other 1% has all the rights to make significant decisions?

The benefit of a share purchase is that the business the company continues seamlessly. By acquiring all the issued shares in a the company, you acquire everything that makes up the business (both positive and negative). The business need not change when control of the company changes, but is usually inevitable that new ownership will stimulate evolution. The new owners will be able to take strategic decisions, implemented through the board of directors: possibly a change in the direction of the business or restructuring.

The risk when purchasing shares is that you also acquire all the liabilities of that company. These might include claims against the company for tax, breach of contract, or debt. Our corporate team, together with your accountants and tax advisers, will help to identify and manage this risk. This is usually through careful due diligence investigations and always by negotiating a suitable agreement for share purchase.

The share purchase agreement is the main document which records the principal terms of the transaction. Through this document the buyer manages the risks associated with buying the company. The agreement may include:

  • warranties – assurances about the business and the company, the breach of which may give rise to a claim for damages (eg that all workers have been paid on a PAYE basis);
  • Representations – specific statements, made by the seller to the buyer about the company and its business which induce the buyer to enter into a contract;
  • Indemnities – these are obligations to put the buyer in the place it would have been if the seller had not misrepresented the position or there is a breach of warranty;
  • Completion accounts – depending on the way the price for the shares is to be calculated, accounts may be prepared to restate the financial position of the company which may lead to an adjustment of the purchase price; and
  • Restrictive covenants – might be included to limit the seller, and perhaps key individuals, from setting up a competing business following the sale or interfering with the customer/supplier/staff relations of the business.

Of course, the sellers will also be seeking to protect their position and during the due diligence exercise and they will provide information about the company and the business to do this. If they disclose a risk to the buyers then the sellers generally cannot be held responsible for it.

For a buyer entering into a share purchase agreement it is important to seek independent legal advice at an early stage so that appropriate due diligence can be undertaken/reviewed and to ensure that the share purchase agreement is negotiated appropriately.

Asset purchase

In an asset purchase the buyer is able to focus on those aspects of the business that they wish to acquire. The liabilities which the buyer takes on are generally associated to only those assets which are purchased. The benefit, for a buyer is that they have more control over what they are acquiring and therefore the exposure to risk.

If a seller allows it, a buyer can pick the assets it wants and leave everything else in the business (such as its debtors and creditors and liability for claims arising out of things done before the sale) with the seller. Both the buyer and seller will need to be very clear on what is being purchased and what is not.

The main exception to the rule that the buyer and seller can agree what is passed on is in relation to employed staff who will invariably have their employment transferred from the seller to the buyer upon the same terms. There are very specific laws to ensure that, except in exceptional cases, this takes place and that the staff are consulted about the change in ownership of the business at the appropriate time.

The asset purchase agreement will identify those business assets that are being bought and will often state what is to remain with the seller. The agreement may contain references to specific premises, plant and machinery, contracts associated with the assets, stock, and work in progress. The agreement will provide for the transfer of the goodwill of the business with the purchased assets as a going concern.

Our corporate team can help to protect buyers by undertaking due diligence checks and, as with a share purchase, negotiating appropriate representations, warranties and indemnities.

A common area of concern for the buyer of any business is the loss of skill and knowledge that arises when a key director or owner/manager exits the business following the purchase. That person’s specific knowledge and business contacts have usually been accumulated over many years and a buyer may wish for there to be a transition period. Exiting owners/directors may be persuaded to enter into consultancy agreements for specific periods to ensure continuity.

With no two corporate transactions being the same, it is important to seek independent and expert legal advice well in advance of discussions with the owners of the business.

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