{"id":556,"date":"2016-02-19T12:00:24","date_gmt":"2016-02-19T12:00:24","guid":{"rendered":"https:\/\/lancasterclements.co.uk\/?p=556"},"modified":"2016-02-18T21:34:01","modified_gmt":"2016-02-18T21:34:01","slug":"points-to-consider-when-buying-a-business","status":"publish","type":"post","link":"https:\/\/www.lancasterclements.co.uk\/points-to-consider-when-buying-a-business\/","title":{"rendered":"Points to consider when buying a business"},"content":{"rendered":"

The process of buying a business is often long and complex, but it can be straightforward if you cover all of your bases.19<\/strong><\/p>\n

Type of purchase, assets or shares<\/strong><\/span><\/p>\n

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If the business is run by a sole trader or a partnership then there will be no shares to buy. The assets including contracts and goodwill of the business will be sold by the seller – an \u201casset sale\u201d.<\/p>\n

If the business is owned by a company there is a choice of buying the assets from the company or buying the whole company itself by acquiring its shares from its shareholders.<\/p>\n

Much of what follows concentrates on share sales and purchases, but most of the principles are very similar in an asset sale. We have highlighted the main differences where appropriate.<\/p>\n

The general rule of thumb for a company sale is that a buyer will normally prefer to buy the assets of a business and the seller will prefer to sell the shares; the next section explains why.<\/p>\n

The important point to remember is that in an asset sale, the company<\/em> itself will be selling the assets, whereas, in a share sale, the individual shareholders<\/em> of the company will be the sellers.<\/p>\n<\/div>\n

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From the Seller\u2019s Perspective<\/strong><\/em><\/p>\n

Share Sale<\/strong><\/p>\n

If a shareholder sells his shares in a company then he achieves a complete break in the relationship between him and the company. However, the buyer will probably insist on some contractual promises (warranties) and indemnities about the company, which will continue to bind the shareholder after the sale.<\/p>\n

No Liability for Debts<\/strong><\/p>\n

Assuming that the seller of shares is released from all third party guarantees (eg: as a director, any personal guarantees given to the bank) at completion, he will have no liability for the debts of the business which remain the responsibility of the company in the hands of the new owners, because in law a company has a separate legal personality from its directors and shareholders.<\/p>\n

Asset Sale<\/strong><\/p>\n

If there is an asset sale, then, with a few exceptions (eg: employees), the seller will keep all the current liabilities of the business \u2013 unless he can negotiate with the buyer to take them over with the business.<\/p>\n

Purchase Price<\/strong><\/p>\n

By selling his shares, the selling shareholder will usually receive the purchase price directly himself. If there is an asset sale then the money is received by the selling company. The owners (shareholders) of the company have the problem of extracting that money either by dividends (often tax inefficient) or liquidation (expensive).<\/p>\n

Tax Clearance<\/strong><\/p>\n

In some circumstances the seller\u2019s accountant will need to apply to HMRC to obtain \u201cclearance\u201d for the structure of the deal to avoid unexpected tax liabilities after completion.<\/p>\n

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From the Buyer\u2019s Perspective<\/strong><\/em><\/p>\n

The buyer will generally prefer to buy the assets and goodwill of a company, as this will enable him to pick exactly which assets he is buying and identify precisely those liabilities he wishes to take over. All other liabilities will be left with the seller.<\/p>\n

\u201cWarts and All\u201d<\/strong><\/p>\n

As mentioned above, when buying shares, a buyer takes the company \u201cwarts and all\u201d \u2013 which is why thorough due diligence is so important. Although the buyer can take warranties from the seller and receive indemnities, they are generally only as good as the wealth of the person giving them. Also, the buyer may be forced into expensive litigation to recover monies under the warranties\/indemnities.<\/p>\n

Retention<\/strong><\/p>\n

Sometimes the buyer may be advised to keep back part of the purchase price (\u201ca retention\u201d) as security against unwelcome undisclosed liabilities after completion.<\/p>\n

Due Diligence<\/strong><\/p>\n

In-depth business, legal and accounting investigations into the target company (called \u201cdue diligence\u201d) will inevitably be more extensive in a share sale than would be the case in an asset purchase. This does cost time and money but we strongly recommend that you take the opportunity to make these enquiries to assess the true position of the business before you are committed to the deal. For more detailed discussion on due diligence please see section 10.<\/p>\n<\/div>\n

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When would a buyer choose to buy shares rather than assets?<\/strong><\/em><\/p>\n

There are several instances where this might be the case:<\/p>\n