Part of purchasing a business means thinking about what you are going to end up with after you settle. Are you going to buy the shares of the company that owns the business – or will you just buy the assets of the company plus some goodwill? Most transactions in the SME space are asset and goodwill sales, rather than share sales and I’ll go over a few reasons for that.
Let’s start with buying the shares. Buying the shares keeps the takeover simple right? While it could mean some advantages like not having to update sales contracts or negotiate new contracts with staff there are fish hooks to be wary of. So the previous owner had some tax arrears? Surely the IRD won’t hold me to that - I’m just the new owner. I’m pretty sure I don’t have to refund that customer for the previous owner’s faulty work – it wasn’t me.
What do you mean employee grievance – I just started here!
Buying the shares of a company means you take over all the history of that company – the good and the bad (and probably the ugly too). If there’s something lurking in the closet – you’ll find out about it at some point and it will be your problem to sort out. How do you get comfortable about all the past activity of a company while doing your due diligence? The unknown risks are a big reason most people don’t buy the shares, they buy the assets out of the company instead.
Buying the assets out of the company means more set up work but less risk as you have none of the old business history following you to your new venture. You’ll set up a new company, settle the deal, enter into new contracts with staff, negotiate credit arrangements and then start producing and selling your widgets. If the existing business name has value to you then there are ways and means to ensure you still retain that name. In most situations I recommend that my clients buy the assets rather than the shares as it pays to be safe.
Despite all this there can still be good reasons to buy the company shares. If you’re taking over for mum and dad, then you probably know where all the skeletons are if you’ve been in the business a while. So that reduces the risk. Sometimes buying the shares can make it easier to continue supplier and credit relationships. Starting a new company can mean having to get credit approved or supply agreements renegotiated and that isn’t always straight forward. This may be enough to consider that the benefits of buying the shares outweigh the risks.
Whether its better to buy the shares or the assets of the company is a critical decision you need to make right at the start of buying a business. You better get it right. Note that people selling their business can sometimes be motivated to sell the shares for tax reasons so make sure you go into the deal eyes open. I suggest getting advice from an expert as they can help you properly understand the deal and all the risks involved.