Are you thinking about taking over or buying a business?
Perhaps a coffee shop, or retail business, or hairdressers, or restaurant?
It doesn’t really matter what type of business, as there are certain fundamental things you need to watch out for.
I’ve bought, developed and sold many businesses since 1986. I’ve made money, lost money, and learned many lessons along the way.
There is a number of critical factors you will need to consider.
In this piece I am going to look at 3 vital areas to consider.
Okay, let’s get started.
1.How to structure the purchase
There is essentially two methods of carrying out the transaction-
1) A share purchase
2) A purchase of the assets and liabilities of the business.
The most popular method is by way of share purchase but you do need to carefully weight up the pros and cons with your solicitor and accountant.
The purchase of assets and liabilities approach to buying a business has the advantage of allowing you to choose which assets you will buy and which liabilities you simply will not take on.
It does run the risk though of being challenged subsequently by a creditor who has not been paid and whose liability you have not taken on as part of your purchase.
Comparison of Share Purchase v Asset Purchase
As the buyer you will choose which assets and which liabilities you are taking on.
However it is difficult to get your hands on any tax losses of the target company and you many end up paying significant stamp duty depending on what assets are included in the deal.
With a share purchase you will only pay stamp duty at 1%, regardless of the value of the target business.
The employees of the company will be taken on as a matter of law as part of the transaction; you may however be able to benefit from any tax losses which pass from the target company.
All assets and liabilities pass as part of the share transaction so the potential for liabilities rising up to bite you down the road is high.
Due diligence essential
It is absolutely vital that proper due diligence is carried out before buying a company or business.
Depending on the size and complexity of the target business it may be necessary to carry out due diligence under the following heads (this is not an exhaustive list)-
- Statutory obligations (CRO obligations included)
Other critical issues to be dealt with include
- Warranties (statements given by the vendor to the buyer in relation to the business being acquired).
Warranties would normally cover matters such as the target companies accounts, pending litigation, taxation, employees, assets, liabilities and essentially all aspects of the companies affairs.
- Disclosure letter ( a letter from the vendor to the purchaser which sets out where the target company has any issues in relation to the general warranties already provided).
This might include any problems the target company/business has in relation to employees, title to property, insurance, banking facilities and any number of other areas where the actual position on the ground deviates from the warranties given in the agreement to sell.
2) The premises
If there is a premises in which the business is carried on you will need to be careful that you are getting good title, regardless of whether it is freehold or leasehold.
Don’t take for granted that all is in order. The premises/property aspect of your business start up or takeover requires careful consideration and the usual conveyancing considerations will need to be carefully examined.
I have written many articles about commercial property and things to consider when buying or leasing a commercial premises. (See 10 things to ask when leasing a commercial premises).
Key issues here, if you are getting or taking over a lease, include
- the length of term of the lease,
- the annual rent,
- whether you are responsible for rates and insurance,
- how often are rent reviews,
- is there a break clause to allow you exit relatively painlessly.
3) Existing employees
If the business you are taking over has existing employees don’t think that you can give them a trial or put them on probation and then get rid of them if they don’t work out or suit your approach.
Any existing employees are almost certainly going to enjoy the protection of TUPE regulations.
This means you must legally recognise their service to date and safeguard their existing terms and conditions of employment.
There could be aspects of their employment with which you don’t agree, for example sick pay or travel allowances. If you want to change anything you will need to reach agreement with them, because you cannot change the contract of employment unilaterally.
The protection of TUPE regulations will flow from the fact that, almost certainly, your takeover will be a transfer of undertaking from a legal perspective.
TUPE law is complex and affords significant protection to employees. I have written a couple of articles about TUPE, which will give you a good idea of what’s involved:
Other considerations worth noting
A vital aspect of any successful takeover is understanding the business, and industry, you are getting into.
Things change rapidly in business. I have written about the death of the newsagent, and how retailing has changed so much in the last 25 years.
If you are taking over a business, or starting one from scratch, you are entering into a potentially lonely station where the easiest thing in the world is to second guess yourself and fear the opinion of these “experts”.
Think about what Theodore Roosevelt had to say in “Citizen in a Republic”, in the Sorbonne, Paris, 1910 :
It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again..
Finally, good luck!
Enjoy the journey, and learn from it.
By Terry Gorry