Buying a business – considering some of the key issues

In order to foster the development of one’s business, an undertaking may wish to expand by acquisition. The buyer should consequently have an intelligible strategy that warrants the purchase and provides the necessary criteria for finding a suitable target. It is also imperative that one determines their maximum spending amount and devises a timetable for executing the acquisition. Moreover, the nature, size and type of business that the purchaser seeks must be confirmed from the very outset in order to avoid an impetuous decision.

When the target business is carried on by a company, it can be acquired in two ways:

  • Share purchase – the buyer will acquire the shares of the seller
  • Asset or business purchase – the buyer will purchase each of the individual assets that comprise the target business

 It is important to appreciate the fundamental differences of these two acquisition structures. Firstly, if the buyer has purchased shares, it would have also acquired all the assets, liabilities and obligations of the seller (even those the former does not know about). Conversely, if assets are bought, only the identified assets and liabilities that have been agreed on would be procured by the purchaser. Secondly, on a share purchase, shares are transferred after completing and submitting a stock transfer form. In the case of an asset or business purchase however, the assets that are being bought must be identified and transferred in accordance with specific forms of transfer. Thirdly, the buyer might need more permissions and approvals from third parties when purchasing the assets of a company. Due to there being a change in ownership of the assets themselves, the consent of customers, suppliers, landlords and others may be required for an assignment or a novation agreement. Fourthly, should one proceed with a share purchase, they would be buying a company that owns the target business. In contrast, acquiring assets will not necessarily transfer existing trading arrangements to the purchaser.

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During the negotiations (normally at the earliest possible opportunity) the buyer must carry out due diligence. This would mean comprehensively investigating virtually every area of the target business. After completing the research process, one should get an accurate picture of the target and its crucial success factors, strengths and weakness. Without due diligence, the buyer will find it very hard to pinpoint the level and areas of protection that it needs before entering a contractual relationship. Thus, the information that is obtained from the investigation could aid the purchaser in deciding whether the acquisition is worthwhile. Once revealed, any financial (or other) risks connected with the transfer can increase the buyer’s bargaining power in respect of the purchase price and the protective clauses (indemnities and warranties).Â

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