In the first of four blogs on buying and selling a business Kelly Craig takes us through the first steps.
This first one focuses on where to start and what to think about before getting into negotiations and commercial terms. We have noticed a trend that people are not always aware of the ways in which they can go about structuring the sale/purchase of a business. There are two main methods when the deal relates to a company: a sale of the assets or a sale of the shares.
How you choose to do this may be influenced by a number of factors, including: the assets and liabilities of the business, time scales, the type of business, the bargaining powers of the buyer and seller and tax advantages.
Here are some of the top things to consider before deciding upon a type of sale or purchase:
1. Assets and Liabilities
A buyer may want to structure the deal as an asset purchase because they are free to “cherry pick” the assets which they like and leave behind the liabilities with the seller. The seller will usually wish to sell the company’s shares so that the whole entity is transferred “warts and all”.
2. Continued Trading
The sale of shares enables the buyer to continue “business as usual”, presuming that there are no clauses in the contracts with suppliers etc which enable them to be cancelled if there is a change in the ownership of the company.
On the other hand, if structured as an asset purchase, the buyer will need to enter into new contracts or arrange for the existing contracts to be transferred to them. The risk is that customers and suppliers will seek to take commercial advantage of this position and drive down the buyer’s margins.
3. Warranties and Indemnities
The sale or purchase contract will typically contain statements called warranties and indemnities. These bind the seller to recompense the buyer for loss suffered if the statements are untrue or misleading. These will be extensive in a share purchase to protect the buyer against the risks of buying the company in its entirety. An asset purchase will generally feature less extensive warranties because of the “cherry picking”.
4. Due Diligence
The buyer ought to be looking to carry out thorough investigations or “due diligence” into the company’s affairs – and much more of it when the deal is structured as a share purchase. The buyer is potentially acquiring substantial liabilities – for example, there may be potential tax claims or threats of litigation which have not yet materialised.
5. Promotions Communications
Dull as it sounds, the communication of the sale of certain financial securities (including shares) is governed by the Financial Services and Markets Act 2000 (FSMA) as “invitations or inducements” to investment activity. In order to avoid falling foul of these complex rules, an asset purchase is safer as they are exempt from the FSMA.
Transfer is more streamlined in a share sale. The parties enter into a share purchase agreement to document the terms of the deal. Registering the details of the transfer forms in the company’s books makes it effective.
The complexity of an asset purchase will depend upon what is being sold. It could include land or leases, new or transferred contracts, intellectual property rights, licences and consents or other ownership documents, like car registration papers.
As you’ll see, the “shape” of the sale or purchase – and what the buyer and the seller expect to happen – can vary quite substantially. We’ve done lots of this and can work with you and your accountant (and other advisers) from the start in order to get this right.
If you are considering buying or selling and would like further advice about the matters discussed above please feel free to contact Alan Stalker on 01383 721621.
Alan Stalker: email@example.com
Kelly Craig: firstname.lastname@example.org
Angus McGuire: email@example.com
Steven Wicks: firstname.lastname@example.org