Business Sale Agreements
The purchase of a business may involve the purchase of the target company’s assets, or by the purchase of the target company itself. There are numerous considerations to take into account in deciding which is the best way to proceed. We and your accountants can advise you upon this, and should be consulted at as early a stage as possible, whether you are buying or selling. A seller should realise that it may be beneficial from a tax point of view to sell the company, rather than its assets. A buyer should be aware that buying the company also involves buying its liabilities, and the full extent of those liabilities may not be immediately apparent.
When a purchaser acquires a company by the purchase of its share capital, both the assets and liabilities of the company are acquired.
Therefore, in a purchase of the business it is essential to investigate the target company to ascertain exactly what the state of affairs of the company will be at the time of the purchase of the shares. This is done by conducting an investigation of the target, its assets and its liabilities. This will usually be in conjunction with any due diligence enquiries undertaken by the investigating accountants. The information gathered culminates in warranties given by the directors or owners of the target company as to the state of the company at the time of purchase. A purchase of shares in this way indirectly takes over the company’s assets at their historic cost; they may inherit a potential deferred tax liability. This usually affects the cost that the purchaser is willing to agree to pay for the shares.
After an inspection of a company’s properties and its assets, an investigation of the company itself should follow. Such enquiries include:
- Appropriate company searches
- Inspection of statutory books
- Investigation of the title to property and premises verifying the ownership of the target’s own intellectual property rights and if necessary, the nature and terms and conditions of licences to use intellectual property owned by others.
- Verifying the target’s financial position, with reference to overdrafts, charges and provision of guarantees
- Inquiring into any material litigation or product liability exposure
- If necessary, engaging environmental consultants, surveyors, pension advisors and insurance brokers
- Obtaining appropriate warranties and indemnities to ensure the opportunity for recourse by the purchaser against the directors of the target should the information provided by or on behalf of the target prove to be in accurate.
A share sale is technically a straightforward transaction, accomplished by the execution of standard share transfers. However, the sale is likely to be effected by a detailed share sale agreement, incorporating many warranties and, sometimes, a tax indemnity (or deed of covenant), allowing potential claims to be made by the purchaser against the vendor.
From a Seller’s perspective, the sale of shares will be a disposal for capital gains tax purposes. Outgoing shareholders usually aim to maximise their ‘net of tax’ position and avoid pitfalls arising from anti-avoidance legislation. Various ways to do this include:
- Leaving the UK and attaining non-residence status
- Deferring the charge by taking loan stock or other securities issued by the acquiring company
- Having the target company declare a substantial dividend or buying some of the seller’s shares prior to the sale.
A share sale is favorable if the seller plans to discontinue its business as liabilities of the target company will inevitably pass to the buyer and the risk of a double tax charge is avoided.
If the seller plans to stay in business, a share sale is normally not recommended since gains realised on the sale of the shares cannot be rolled-over into the purchase of new business assets.