Buying a business: are you getting shares or asset?

The opportunity to purchase a competing or complimentary business provides an important route to expansion, but it is important to be clear about what exactly you are acquiring in a business - whether this is via shares or assets.

According to corporate specialist, Saverio Salandra with Thackray Williams. ‘It is crucial that any acquisition is structured appropriately to ensure the best deal and to obtain an attractive return on investment.’

Share purchase

Although the company directors operate businesses on a day-to-day basis, the real control of any company is vested in the ownership of shares. When acquiring shares, a key question will be whether you require or desire control of the company and therefore need to acquire a majority stake.

The benefit of a share purchase is that the business is operating as a going concern, and you will acquire the contracts and business relations that create the future pipeline of business income. After the transaction has completed, you will be able to take strategic decisions through the directors on any change in the direction of the business and possible restructuring.

As with all corporate transactions there is a risk when purchasing a shareholding as you also acquire all the liabilities and risk associated with the target company. Liabilities can sit in various guises such as claims against the company for defective goods, or contracts which are in breach due to delays in production or delivery. In addition, liability can also be linked to the debts of the company. Your solicitor will help to manage this risk through carefully targeted due diligence investigations and by negotiating a well-structured share purchase agreement.

The share purchase agreement is the main document which records the principle terms of the transaction for the buyer. It manages the risk associated with liabilities in four principle ways:

• warranties, which are specific statements made by the seller to the buyer in respect of the company and are based on the information arising out of the due diligence exercise;
• indemnities, which carry more weight than a warranty and will be included in the agreement if during the due diligence exercise an issue is identified which requires a specific indemnity;
• completion accounts, which are prepared by the seller’s accountants, will represent the seller’s financial position and
• covenants, which can be included in an agreement to limit the seller and key individuals from setting up a competing business within a geographic area within a specific period of time.

Of course, the seller will also be seeking to protect their position and during the due diligence exercise, they will be providing a wealth of information. If they identify a risk, then they can refer to it in documentation which sits behind the disclosure letter.

From the perspective of either party entering into a share purchase agreement it is important to seek independent legal advice from a solicitor so that the document can be drafted and negotiated effectively, and any provisions can be enforced if required.

Asset purchase

In an asset purchase the buyer acquires only the aspects of the target business that they wish to purchase. The liabilities which are being assumed in these transactions are limited to only those assets which are purchased. The benefit for the buyer is that there is a degree of control and certainty on the risk that the transaction attracts.

By cherry picking assets the buyer is selecting the stronger aspects of the business, but they will need to be very clear as to what is being purchased and what is not being purchased in the transaction. For example, an acquisition of an operating division can include staff which gives rise to the transfer of employees and liabilities under the TUPE rules and in regard to pensions.

The asset purchase agreement will record the seller’s assets being acquired by the buyer. The agreement may contain references to specific premises, plant and machinery, contracts associated with the asset, stock, and work in progress. The agreement is likely to contain reference to the goodwill of the assets which come from the reputation of the business.

Solicitors help to protect the buyer’s position by undertaking targeted due diligence checks and seeking warranties on areas of the assets which pose a potential concern.

A common area of concern for the buyer of any business is the loss of skill and knowledge that arises when a key director exits the target business on completion. A director’s specific knowledge and business contacts have usually been accumulated over many years and can be a huge benefit to the buyer going forwards. Some exiting directors may be willing to enter into a consultancy agreement for a specific period of time to ensure the continuity of knowledge and skills.

With no two corporate transactions being the same it is important to seek independent and expert legal advice well in advance of discussions with a target company. Research can be done behind the scenes, so that you enter any negotiation in a strong position.