Every entrepreneurial client that I have acted for has purchased companies and businesses for different reasons. It might be increasing someone’s personal success, increasing market share, access to new markets, acquiring new brands and so on.
Since there are different tax issues which arise depending upon what and how you buy, it makes sense to take professional advice at an early stage – the benefit to you is that it will tend to make the transaction much smoother.
The following is simply a brief tour of some useful points to keep in mind.
Asset purchase
In an asset purchase, what you’re essentially buying are items.
Tangible items would include things such as buildings, plant, and equipment stock. Intangible items would be things such as brands, trade marks, goodwill and perhaps book debts.
It is common to see these asset deals contain provisions to enable any debts or liabilities to be taken into account – so that only the net asset price is payable. These provisions can have a significant effect on the sums involved.
Share purchase
Here you are essentially dealing with a transfer of ownership. This means that you take, bag and baggage, all of the history of the company.
It’s because a Buyer will inherit any liabilities that may reside in the company that a Buyer will seek extensive warranties and indemnities from a Seller. On the other hand, a Seller will of course be seeking to minimise his risk by blunting the scope and extent of such contractual promises.
Staff
Whether it’s an asset purchase or a share purchase, most deals will involve consideration of the staff employed in the business that you are buying. Why is this important?
Commercially you would have already made your assessments upon the existing staff but from a legal perspective there are some factors to consider in asset purchases. Basically, you need to consider the effect of the “TUPE” regulations. TUPE has the consequence that all of the relevant staff (plus pension rights etc) will be automatically transferred to you upon completion.
Those relevant staff will enjoy all the same rights and benefits that they did previously and neither the Seller nor the Buyer can contract out of the effects of TUPE.
Customer base/Supplier contracts
Obviously, buying a company with an order book full of long term contracts will mean a nice revenue stream post completion. It is worth making sure whether any of those contracts (and indeed any materially significant contracts) contain clauses such as “change of control” or novation provisions which may allow a customer or supplier to lawfully bring to an early end any arrangements, or to withdraw any beneficial terms of supply, or to ensure continuity of service.
In an asset purchase scenario, all these important contracts will need looking at since they will almost certainly not be automatically transferred over to you.
Our specialists have years of experience in transacting business sales and purchases.
This article was written by BJ Chong who specialises in Business Law.
September 2010
