Buying a Business, what are you actually buying?

Buying a Business, what are you actually buying? image

There are mainly two ways to structure a business purchase, “an asset purchase” or “a share purchase”.

“Purchase of Assets”

Buying the assets of a business involves the buyer purchasing a selection of assets (physical and non-physical).

An asset purchase allows the buyer to buy the underlying parts to a business, and not the entity that owns them. It gives greater scope as it permits for purchase of unincorporated business (sole traders or partnerships).

The buyer has the ability to cherry pick the assets and liabilities they want as none of the assets will transfer automatically. The terms of the contract are typically laid out in an Asset Purchase Agreement (APA). Subject to certain limitations on the transfer of employees under Transfer of Undertakings Protection of Employment rights (TUPE) and the Environmental liability, the unwanted assets and liabilities remain with the seller on completion.

Frequently acquired assets using an APA include:

  • Business information
  • Goodwill
  • Premises (freehold or leasehold)
  • Stock
  • Intellectual Property (IP) rights
  • Information technology and IT systems
  • Business contracts

Buyers will need to contemplate the relevant law for employees to transfer across with the business (TUPE) and it is a good idea to seek legal advice on this issue.

It is worth noting a well drafted APA will include provisions for warranties and indemnities that cover the buyer on automatically assuming liabilities that arise after completion.

“Purchase of Shares in a Limited Company”

Buying the shares in a limited company involves the buyer purchasing the majority of, or entire share capital in the company, taking over the target business.

The buyer will buy the ownership of the limited company from the shareholders and the limited company carries on the business. The limited company will continue to run throughout the transaction as a separate legal entity and the company continues to own the assets, rights, responsibilities, and liabilities. A share purchase is only possible for a business that is run and owned by a limited company with shares.

The only asset that will transfer to the new owner is the shares in the company and involves the shareholders transferring their shares with a stock transfer form to the buyer. It is not uncommon for the seller to be several shareholders and may include other companies as shareholders too.

It is usual for a Share Purchase Agreement to detail the transfer of shares between the buyer and the seller and will include any warranties and indemnities provided by the seller.

The transaction will require a high level of due diligence to make sure the buyer is clear on the health of the company, and it is advisable that the buyers accountant is involved at an early stage to help with this work, in particular to make sure the tax  affairs of the company have been correctly filed and paid.

The legal work required for a share purchase involves drafting documents including the share purchase agreement, and may also include board resolutions, resignation letters for directors, stock transfer forms, and others. In reality, the transfer of shares may be easier but there is more legal work involved to really understand the company liabilities which pushes the legal fees of a share purchase above that of an asset purchase.

Each structure can achieve a similar commercial objective i.e. control of the business. However, which one you choose will purely be down to whichever vehicle is favourable and the legal implications you are willing to take on.

If you are looking to buy or sell a business and would like more information, please give us a call on 01747 854244

 

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