Whether you enter into an agreement to buy or sell the assets of a business, or the shares of the company will likely be influenced by the bargaining positions of the vendor and the purchaser.
The purchaser will most likely want to buy the assets due to the potential of taking on unknown liabilities via a purchase of shares.
With an asset purchase the purchase price is broken down into assets acquired i.e. trading stock, plant and equipment and land and buildings. The balance is attributed to good will. The break down should be on market value of the assets. However, there are natural tensions between the vendor wanting to maintain the tax book value of the assets (to avoid any liability for depreciation recapture on the sale); and a purchaser wanting a higher value attributed to the assets (to ensure a high cost base to begin with) so they can claim more depreciation in the future. It is common for parties to negotiate on this point and best to have these figures agreed to in writing at the time of signing an agreement.
The process is simpler but the unknown potential liabilities are much greater. The shareholders agree to sell their shares to the purchaser for consideration or cash. This involves the conveyance of shares rather than the company’s assets. Here the tax cost of the assets remains with the company. On settlement the purchaser becomes the new shareholder of the company. Simple…. from the vendors perspective.
In either an asset or share purchase the agreement should have some form of Due Diligence period. This is where you get the opportunity to investigate the things that make the business tick: Employment Contracts, Financial Statements, Forecast Projections, Supply Contracts, Undisclosed Liabilities to name a few aspects. This process can be as extensive or as limited as you wish. The purpose is to verify the purchasers value expectations and outline the areas of concerns. If things don’t stack up then there is an “out”. Be wary of a vendor who will not agree to this. What are they hiding? In a share purchase this process should be more extensive as you will need to investigate all the liabilities, contingent or otherwise that the company has taken on. The probability is that these will be transferred to you as purchaser. A common aspect to look at is any guarantees a company has given and whether they are limited or unlimited.
A Due Diligence period is important from a vendors perspective also. Where the company has been well run and the financial records are in good shape there should be no problem, however if the business is in a shambles this provides a perfect opportunity for the vendors to assess any risk they may take on given the warranties required in the agreement.
There is a lot to think about when looking to either buy or sell a business. The above being only one part of the equation. The best place to start is a meeting with your Lawyer and Accountant who can help advise you on the best structure and any tax implications you may face.
Our thanks to Rosie Allen for writing this article