Companies, Partnerships and Directors
Buying a business
Should I purchase the shares or just the assets? A fundamental question, of course, and one that you should address at the outset before committing time and resources to a possible acquisition.
What are the basic and important differences?
If you purchase the shares in a company, you will acquire that company and its business “warts and all”. This means that all assets of the company (plant, machinery, premises, staff, contracts), and all liabilities (financing, leases, product liability), will transfer to you as purchaser. You cannot generally pick and choose. In return, however, you have the benefit of business continuity and goodwill preservation – to the outside world, nothing will have changed and the company and its business will simply continue, albeit in new ownership.
With an assets purchase, however, you buy only what is identified in the Sale and Purchase Agreement as being bought and sold. This might mean plant, equipment, contracts, intellectual property rights, customer lists and goodwill. As buyer, you will probably seek to leave behind finance arrangements, bank overdraft, surplus premises and product liability issues. You will therefore end up (all being well) with just the positive, valuable aspects of the business, which you can seek to develop and maximise. The seller company will then probably liquidate once the sale proceeds and any ongoing warranty commitments to the buyer have been dealt with.
So what drives the choice between a share purchase and an assets purchase?
Inevitably tax considerations will also be important and you should seek input from your specialist advisers as soon as possible. As a broad rule of thumb, it is often the case that a share sale is preferred by sellers, whereas an assets purchase is the buyer’s choice. This is because selling shares will often give the seller the benefit of tax reliefs and not involve the double tax charge of selling assets out of a company, the company paying tax on that and then the shareholders paying tax on receiving money out of the company. From a buyer’s perspective, however, purchasing assets may well give the benefit of capital allowances on assets acquired, which can be of significant value. As ever, there is a balance to be struck between the needs of seller and buyer and that balance may well be reflected in negotiations over price.
The key point is to address, and resolve, the transaction structure as early as possible. Preliminary work can then begin and will be shaped by that structure. If you are acquiring shares, the level of advance due diligence work will be greater (to minimise or at least understand the “warts” you will acquire). If assets, you may need to delve deeper into how they will be transferred in legal terms – are there any business-critical contracts that need to be transferred or even re-negotiated at some point?
So, take advice early. Always consider entry into a Confidentiality Agreement to protect both parties and, in certain circumstances, a Exclusivity Agreement, whereby seller agrees to give you a clear-run at the acquisition for a specified period.