Businesses may be acquired either through an acquisition of shares, or through an asset purchase. The two different approaches to an acquisition affect the legal processes involved in a buying a business.
Here’s a quick look at what this means for the buyer.
Share sale
A share sale is, in theory, the most straightforward acquisition process as it is simply a change in the shareholder who owns the limited company (or ‘target’) which carries on the business.
To the outside world there would be very little change as the employer remains the same, as does the entity that customers and suppliers contract with.
As a buyer, the downside of a share purchase is that you will inherit the target “warts and all”. A thorough due diligence exercise is therefore needed to ensure any potential liabilities or unusual issues are identified prior to completion.
Find out more about due diligence for buyers in our Take 5 Guide here
For instance, the target may have ongoing litigation or regulatory claims against it (or circumstances which could lead to one or both of these). Carefully drafted protection in the sale and purchase agreement will give the buyer a potential remedy against the seller to ensure the risk of such issues remains with the selling shareholder(s).
Similarly, it is possible for HMRC to seek the payment of tax by the target even though it relates to a period of trading when the target was owned by the former shareholder. A tax covenant can provide you with recourse against the selling shareholder(s) in such a scenario.
Completion accounts will also be needed as part of a share purchase so that there is an adjustment of the purchase by reference to the exact financial position of the target on the day of completion.
Asset sale
In the case of an asset sale, typically the target business is transferred from one legal entity to another. As a result, there will be practical issues to resolve including the assignment or novation of resident contracts and material supplier contracts, dealing with TUPE (legislation that protects employees’ rights when the business transfers to new owners) and the assignment of property leases, where the freehold of a business property is not owned by the seller. The added complication of needing to involve a third party in the form of a landlord can lead to delays if not dealt with early or appropriately.
The major benefit of an asset purchase for the buyer is that you can be selective about what assets, and more importantly, what liabilities are transferred to you. This can therefore make the transaction lower risk compared to a share acquisition.
Seek advice
Buying a business is a complex process and each purchase is different depending on the structure of the business and the assets being purchased. A specialist corporate lawyer will be able to look at any potential transaction and advise on whether a share acquisition or purchase of assets is the best approach for you.
Things Corporate specialists are leaders in supporting businesses to succeed and grow, and through the processes of sale or acquisition. For more information about the team and its services, see here.