The opportunity to buy a competing or complimentary business provides an important route to expansion, but it is important to be clear about what exactly you are acquiring in a business- is it shares or assets?
Although a company's directors operate it on a day-to-day basis, the real control of any company is vested in the ownership of its shares. When acquiring shares, a key question will be whether you require or desire control of the company and therefore need to acquire a majority stake.
As with all corporate transactions there is a risk when purchasing a shareholding, as you also acquire all the liabilities and risk associated with the target company. Liabilities can sit in various guises such as claims against the company for defective goods, or contracts which are in breach due to delays in production or delivery. In addition, liability can also be linked to the debts of the company. Your solicitor will help to manage this risk through carefully targeted due diligence investigations and by negotiating a well-structured share purchase agreement.
Of course the seller will also be seeking to protect their position, and during the due diligence exercise they will be providing a wealth of information. If they identify a risk, then should refer to it in the documentation which sits behind the disclosure letter.
In an asset purchase the buyer acquires only the aspects of the target business that they wish to purchase. The liabilities which are being assumed by the buyer in this kind of transaction are limited to only those assets which are purchased. The benefit for the buyer is that there is a degree of control and certainty about the risk that the transaction attracts.
The asset purchase agreement will record the seller's assets being acquired by the buyer. The agreement may contain references to specific premises, plant and machinery, contracts associated with the asset, stock, and work in progress. The agreement is likely to contain reference to the goodwill of the assets which come from the reputation of the business.
Your Solicitor will help to protect your position by undertaking targeted due diligence checks and seeking warranties on areas of the assets which pose a potential concern.
A common area of concern for the buyer of any business is the loss of skill and knowledge that arises when a key director exits the target business on completion. A director's specific knowledge and business contacts have usually been accumulated over many years and can be a huge benefit to the buyer going forwards. Some exiting directors may be willing to enter into a consultancy agreement for a specific period of time to ensure the continuity of knowledge and skills.
No two corporate transactions are the same, so it is important to seek independent and expert legal advice well in advance of discussions with a target company. Research can be done behind the scenes, so that you enter any negotiation in a strong position.
For advice on mergers, acquisitions and general corporate law, please contact Dermot Callinan on 01782 525010 or email dermot.callinan@myerssolicitors.co.uk.