A Guide For Buyers And Sellers Of Business
Who may own a Business?
- In most of the United Kingdom, partnership, an individual (known as a sole trader) or a company may own and run a business.
- A sole trader has the sole right and responsibility for the management and conduct of his or her business. He or she may engage staff to assist but, ultimately, the responsibility vests in him or her alone. Similar, in the case of partnership, it is a fundamental right of each partner, in the absence of any agreement to the contrary between the partners, to be involved in the management of the partnership does not have a legal existence which is independent of the individuals themselves. Accordingly the individual sole trader or partners are liable to the fullest extent of their personal assets for all business liabilities incurred.
- This contrasts with a limited company or a limited liability partnership (LLP). A limited company or LLP is a separate legal entity with an existence independent of its proprietors. As a result, the limited company or LLP may own property, enter into its own contracts and incur its own debts. The Company LLP may sue or be sued in its corporate name. The owners of the limited company or LLP are not generally liable for the debts or other commitments of the company or LLP. If the shares are issued "fully paid" and the company or LLP incurs liabilities which exceed available assets, resulting in the liquidation or receivership of the company or LLP, then the directors shareholders or members cannot generally be called on to Contribute further to meet any shortfall to creditors. The value of their investment is lost but their personal assets are not at risk- in other words, their liability is limited.
Structuring the Sale and Purchase
- If the seller of a business is an individual or partnership, the bricks and mortar of the building can be sold. If the seller is a company, the seller can sell either the Physical premises or shares in the company. The goodwill in the business can also be sold. The goodwill in a business will usually be reflected in the price, but goodwill- which may include sales contracts- can be sold separately.
- At the outset, a company needs to consider whether a share sale or an asset sale is more appropriate. Each structure has its own advantages and disadvantages. A share sale involves the buyer acquiring some or all of the shares in the company that is running the business (the target). An asset sale involves a buyer acquiring selected assets which make up the business, for example, the premises, sales contracts, goodwill, staff and stock in trade.
- When a buyer acquires the shares in a company, he also inherits all the company's assets and liabilities unless they have been transformed out of the company prior to sale. For this reason, a contract for the sale of shares often has a more extensive set of warranties and a tax deed to cover the buyer in respect of unexpected liabilities that may exist in the company.
- If the assets are being sold, the buyer chooses those assets and liabilities he wants to acquire, and leaves with the seller those assets and liabilities he does not want to purchase. It is important to identify what the buyer wants to buy, because the ownership of assets does not automatically transfer to the buyer unless specific arrangements are made.
Share Sale
Advantages to a buyer
- Continuity of business - the business is carried on by the same company before and after acquisition, thereby giving an impression of continuity to the outside world.
- Formation of, or addition to a Group - the buyer and target company will often form a "group" for tax purposes, which will give rise to a number of tax advantages including the ability to set off losses within the group and liability to pay interest.
- Premises - title to any premises held by the target company will automatically pass to the buyer with the target company.
- Contract Rights - contracts will automatically transfer with the target company (subject to any change of control provisions).
- Stamp Duty Land Tax - stamp duty land tax is payable on the transfer of shares (at 0.5% of the price- at the time of going to press).
Disadvantages to a buyer
- The buyer cannot cherry-pick assets and liabilities, and will automatically acquire all the assets and the liabilities of the target company.
- Since liabilities will be inherited, a full due diligence exercise needs to be carried out to establish what the liabilities are.
- Carrying out a due diligence can involve significant professional fees.
Contact
Tony Forster Head of Company Commercial
Martino Burgess Associate
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This article summarises the law on issues which we believe may be of interest to your business. It is not a comprehensive review of the subjects and accordingly is published without responsibility for loss occasioned to any person(s) acting or refraining from action as a result of information published