Thinking about buying a business... have you thought of everything?
Before buying a business, an astute purchaser should consider the following key factors:
- Key Contracts
- Shareholder Arrangements
Shares vs. Assets
If you’re looking at buying a business, one of the first decisions you should make is whether to buy the shares or the assets. There are distinct pros and cons for both options, so here are a few things to consider to help you figure out what’s best for you:
- Share purchase: a purchaser assumes all assets and liabilities relating to the company – including responsibility for any debts owed by the company or any potential claims against the company. It is therefore critical to conduct thorough due diligence and insist on specific vendor warranties – but even these cannot guard against every eventuality. Vendors often prefer a share sale because they can walk away from the company with very little further involvement.
- Asset purchase: a purchaser buys the stock, assets (tangible and intangible) and goodwill of a business. Often purchasers prefer an asset purchase because they can purchase only the particular assets they want without taking on the risks associated with the vendor company
Although these are the general preferences for purchasers and vendors, each option has its pros and cons. You need to consider what makes the most sense in your particular circumstances — here’s a quick checklist of factors to consider:
Key contracts: Are there any key supply, manufacturing or other contracts that are required in order to continue the business? If you buy the shares in a company, those contracts remain with the company but, if you buy the assets, each of those contracts need to be re-assigned to you. This can be difficult to achieve if there is a significant number of such contracts.
Premises: What are the terms of the current lease for the premises – for example, does the landlord require the purchaser to personally guarantee the tenant’s obligations pursuant to the lease? In the case of an asset purchase, is the landlord willing to assign the lease to the purchaser?
Employees: Do you want to take on some or all of the current employees? In the case of a share sale, existing employment contracts would usually continue but, in the case of an asset sale, employees will be made technically redundant as at the settlement of the transaction. You are then free to re-employ some or all of the employees. In an asset purchase, would you want the director(s) of the vendor company to continue working with you for a certain period as handover? What about a restraint of trade after that period? Should the sale be conditional on certain employees remaining with the business in order to protect key relationships with customers and suppliers?
Shareholder arrangements: If you are buying shares in the vendor company, what do the company’s accounts look like? Are there any existing debts in the shareholders’ current accounts which the company would have to pay out in future? If you are buying less than 100% of the shares in the company, is there a shareholders’ agreement and/or a constitution? What do those documents indicate in terms of shareholders’ rights and obligations?
We encourage prospective purchasers to get in touch with us (and their accountants) long before there is an offer on the table. We will help you to structure the acquisition to your advantage, negotiate and draft the agreement for sale and purchase and guide you through the settlement processes so that, whether you buy the shares or the assets, you know what you’re getting and you know that your interests are protected.