Buying a Business: Acquisition Options and Considerations

Buying a business is an exciting time for any entrepreneur.  However, it can also be a significant risk as more often than not you put either your money, or other personal assets, on the line and whilst with great risk can come great reward, this isn’t always the case. Before proceeding with your investment, you should make sure that you understand the process, what you are buying and crucially have a team around you that can support each element of your transaction.

Buying a business

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Once you have your team together and a target in mind, you will need to consider the structure of the transaction and how you are going to work the deal. There are several different factors that you will need to consider:-

Asset Sale vs Share Sale

If the business you want to acquire is traded through a limited company, you could consider buying the shares in that company. However, this would mean that you take on both the assets and the liabilities of the Company indirectly. Therefore, before agreeing this route you should ensure that there are no liabilities that are particularly onerous or would not want to assume (for example historic tax claims) and that the business of the company comprises of the business you want to buy – i.e. there aren’t any other businesses operated through it which you don’t want to acquire. Due diligence therefore becomes particularly prudent if considering this route.

The alternative is that the company sells its business to you as a going concern. This can benefit you as a buyer as you cherry-pick the assets you want and don’t automatically assume liabilities unless you agree to take them on. However, this can have tax implications for a seller and it can be more complicated if there are particular assets or contracts that need to be transferred to you. For example, those subject to asset finance or material customer and supply contracts requiring consent. If this is the case, a share purchase may be more appropriate to ensure continuity of the business.

There is no ‘one size fits all’ in a transaction and it is important that you get the structure that is right for you.

Payment on Completion vs Deferred Consideration

Another key factor in a sale structure is when you will pay for the shares. Naturally, a Sellers preference would be for you to pay for the shares up front. However, there may be many reasons why this isn’t advisable. For example:-

  1. From a legal perspective, there is always the risk that what has been presented to you through the negotiations or warranted to you to induce you to proceed transpires to be untrue and gives rise to a claim. If this is the case, you would be better to be able to set-off the Seller’s liability due to you against the deferred consideration you owe them. Otherwise, you could end up chasing a debt you never realise.
  2. From an accounting perspective you may not have the cash to pay the entire purchase price on completion (as the purchase price may take account of more than the net asset value of the company and could factor in, for example, a multiple of EBITDA and potential future earnings). Therefore, it may be necessary to defer payment of some of the purchase price to enable the funds to be raised.
  3. From a commercial perspective, you may agree for the purchase price to vary depending upon whether or not certain targets are met and post-completion performance of the company. Therefore, this part of the purchase price would be deferred depending upon the outcome.
Post-Completion Adjustments

There are many different adjustments to the purchase price that can be made post-completion.

  • The purchase price may be adjusted to reflect the actual net asset position of the Company on Completion or to take into account the cash in the bank (subject to any indebtedness and there being sufficient working capital) as at completion. These are commonly referred to as a ‘net asset adjustment’ or a ‘cash free/debt free’ deal.
  • The purchase price could also be adjusted depending on post-completion performance of the Company, this could take the form of an ‘Earn-Out’ if the seller is staying on post-completion or even be a direct reduction if the Company’s financial position isn’t maintained, or conversely uplift if it performs!
  • Ultimately, if there is to be any variation of the purchase price your documents have to be carefully drafted so that they are clear, concise and include accountability provisions and the ability for you to fairly challenge any variation.

The above are just some examples of structure variations that may need to be factored into your deal. At the end of the day, each transaction is unique and it’s important that you consider the structure with your professional advisors to ensure that it works for you.

For advice in relation to buying a business, contact the Corporate Team on 01604 828282 / 01908 660966 or email Coporate@franklins-sols.co.uk

Disclaimer: The information provided on this blog is for general informational purposes only and is accurate as of the date of publication. It should not be construed as legal advice. Laws and regulations may change, and the content may not reflect the most current legal developments. We recommend consulting with a qualified solicitor for specific legal guidance tailored to your situation.