Solicitor Brighton

What things should I consider before buying a business ?

Before buying a business, it makes sense to do as much of your own research as possible. If you are a new entrant into the market, you will want to assess whether the market is really for you, the future outlook of the market and the general performance of the business.  If you are buying a company, financial information is publicly available at Companies House.  You will also be able to check whether the company has changed names several times (perhaps to cover previous dodgy dealings or bankruptcies) as only one registration number is allowed.  If you are an experienced business investor, you will of course want to picture how the business will fit in with your current portfolio and what you stand to gain and potentially lose from the purchase.  A SWOT analysis can be useful here.  SWOT stands for strengths, weaknesses, opportunities and threats and is a useful way of getting a better picture of a business.

What is due diligence ?

Due diligence describes the processes used by solicitors and accountants in order to get to the inner workings of a business and find out whether the business is really all it purports to be.  Due diligence comes in two main forms: financial and legal due diligence.

The first step in financial due diligence involves asking whether an audit has been conducted recently or not.  If one has not been conducted within the last six months, another one should be carried out.  The size and scope of the business’s liabilities obviously need to be looked at too.  If you are planning on purchasing a business which employs employees, you might also want to consider undertaking an employee audit to examine the current skill set employees possess, their rates of pay in comparison to market rates and the level of turnover.  You must also try and get an idea of how employees feel about you taking over the business.  Will a considerable number of employees leave?

Without wanting to sound too obvious, legal due diligence involves look at the business’s legal affairs, what it does and doesn’t own and any other property rights the business holds.    Broadly speaking, legal due diligence will examine the legal and equitable position of the business with regards to land, equipment and intellectual property; the existence and extent of any pre-existing legal disputes; the position of the business with respect to employees (employment contracts, pension rights), and existing contractual liabilities with respect to third parties, including product suppliers and customers.

I am looking at buying a company.  Should I just buy the assets or the shares ?

Simply put, asset shares are simpler as you only purchase the assets (and the liabilities of those assets) and do not take on the existing liabilities of the company.  If the company is in trouble with Inland Revenue, for example, then it will be you and not the previous owners who will be held responsible if you hold the shares.  Buying shares can also be particularly tricky where there are a large number of shareholders and a minority refuse to sell their shares.  As a rule, the larger the number of shareholders, the more tricky a share purchase will be.

Some business owners will specify a share sale over an asset share; if the assets are being sold at a price higher than they were purchased, it is likely that the sale will be subject to Capital Gains Tax.  The owner will also have to pay income tax for withdrawing any income.  In effect, an asset sale results in double taxation for the seller whereas on a share sale, tax is payable  only once.