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Acquiring a New Business: What do I need to know?

Evoke Telecom are regularly approached by agencies acting on behalf of clients wishing to buy our business – BUT last month we were offered the opportunity to buy a competitor. What an interesting process that was, and so it gave us the idea to share some helpful tips and advice from an expert. To that end, March’s guest blog has been written by Hasnain Khalid, a Senior Associate in the Commercial team at EHL (Edwards Hands and Lewis) in Leicester.

Here are some simple yet helpful insights from Hasnain:

Hasnain KhalidAcquiring a business – by Hasnain Khalid

When deciding to sell or buy a business, you may be confronted with the decision of whether to proceed with a share purchase or an asset purchase. There are some key differences between the two methods which may influence your decision.

Share Purchase

A share purchase is only suitable where a business has been incorporated as a limited company and has share capital.

In a share purchase the buyer acquires control of the business by purchasing the shares of the company.  This is an “all-encompassing” approach whereby the buyer acquires ownership and control of all of the assets and liabilities of the company.

Any contracts the company was party to prior to the purchase are likely to continue to have effect as before, as the legal entity itself has not changed. This includes employment contracts.

Typically, a share purchase will be more beneficial than an asset purchase for a seller when looking to sell their business, as it acts as a clean break with no continuing liabilities for the seller upon transfer of ownership, except for those warranties, indemnities or covenants that it agrees to give the buyer the benefit of.

Asset Purchase

If the business being sold is run by a sole trader or is a partnership, the sale will take the form of an asset purchase. The seller of a limited company does not necessarily have to sell its shares when disposing of the business; it can instead choose to sell some or all of its assets.

In an asset purchase, the parties can negotiate between themselves to decide which assets of the business will be acquired and which will be excluded from the sale. Assets can be tangible (e.g. land, buildings, equipment, cash) or intangible (e.g. customer lists, goodwill, intellectual property rights). The liabilities of the business are normally retained by the seller, which makes this type of purchase particularly beneficial for a buyer. Careful definition of the assets and excluded liabilities is required in the agreement to achieve this.

When selling business assets, the sale may commonly include the benefit of key contracts the selling business is party to. Unlike a share purchase, in an asset purchase the party to those contracts will change, so whether those contracts are capable of being assigned to the buyer and whether consent is required must be considered. Similarly, if the buyer wanted to continue trading from the same property as the seller had been under a commercial lease, that lease may have to be assigned to the buyer.

Where the business being sold has any number of employees, the TUPE Regulations (Transfer of Undertakings (Protection of Employment) Regulations 2006) will apply which ensures the transfer of all employees to the Buyer.  Both the seller and buyer will have to ensure compliance with their obligations under TUPE.

Ultimately, there are many legal, commercial and tax implications to consider when making the decision as to the best way to sell or purchase a business.

A sound insight there from Hasnain – here are his details if you would like to know more about Hasnain and his background –