3 ways to reduce your risk and maximise your return when buying a company

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Buying a company is considered to be one of the highest risk-investments that you can make. However, there are certain steps that you can take to mitigate the risks of proceeding with your purchase:-

1. Undertake detailed due diligence

I cannot stress the importance of due diligence enough. Buyer beware is a cliché for a reason and it is fundamental that you ensure that you are fully appraised of what you are buying. Due diligence takes many forms and includes:

a. Commercial due diligence, so that you are aware of the practicalities of running the company from completion.

b. Tax and Accounts due diligence, so that you are fully aware of the tax history of the company and how its accounts have been prepared so that any concerns can be addressed.

c. Legal due diligence which is where we delve into the legalities of share ownership and how the business has operated to date.

Ultimately, if you do not undertake due diligence you run the risk of acquiring a company that you cannot run and which may be riddled with legal or tax issues which you need to remedy which can be costly. Whilst provisions can be included in the SPA to protect you from these, it is still better to ensure there are no skeletons in the closet in the first place and ensure that, if there are any, it is agreed as to how this will be addressed which mitigates your risks as a buyer. 

2. Use a comprehensive purchase contract

Buying a company is more than just signing a Stock Transfer Form. Whilst a Stock Transfer Form is the legal instrument that will transfer your shares, it doesn’t offer any protections for the buyer or the seller. A Share Purchase Agreement governs the sale itself and should include a series of provisions including:

a. Payment provisions – to ensure that it is clear how much you are paying and when it is due. It is not uncommon for part of the consideration to be deferred or even contingent but you need to ensure that it is clear as to what is due to be paid and crucially when it is due to be paid to avoid a dispute.

b. Restrictive covenants – these are fundamental to protect the goodwill of the Company post-completion. Your seller will have a significant amount of knowledge, know-how and contacts from their time as owners and you need to ensure that this isn’t utilised post-completion to set up a new business in competition with the one you have just purchased.

c. Warranties – these are contractual promises which if found to be untrue could give rise to a claim against the sellers. These give you some assurance as to the information that you have been provided and risks associated with the company that you are buying. Therefore, they induce you to enter into the contract and proceeding without these can put you at great risk as a buyer.

3. Tax Covenant

Historic tax liabilities are one of biggest risks you run when buying a company. HMRC can go back 6 years and investigate historic returns and claims including, for example, R&D tax credits. If the Company is challenged or penalised post-completion in relation to a return made by the Sellers you should be able to claim this back from them. Therefore, you should ensure that you have in place a tax-covenant to protect you from any undisclosed tax liabilities relating to the Sellers’ period of ownership.

Ultimately, buying a company is always going to be a risk but by following due process and putting in place the right documentation you can mitigate that risk and maximise the return on your investment.  

If you are considering a company purchase and would like more information on how we can assist, please don’t hesitate to get in touch with our Corporate Team on 01604 828282 / 01908 660966 or email Corporate@franklins-sols.co.uk.