Structuring a transaction: How to purchase a business

When deciding how to purchase a business, buyers must consider whether a share or an asset purchase best suits their needs. Below are some of the advantages and disadvantages of different methods of purchasing a business.

This involves a purchaser buying either all of another company’s shares, or a controlling stake in another company. Following a share sale, the target company retains all its assets and liabilities; the purchaser simply acquires the target company’s shares. The purchaser will however indirectly own/take on the target’s assets/liabilities by virtue of its ownership of the target’s shares.

• Control: easier for purchasers to gain full control over a company, including its human capital, tangible assets (e.g. plant and machinery) and intangible assets (e.g. business relationships, good will/brand loyalty, intellectual property rights, and knowledge of internal processes). 
• Savings: purchasers are exempt from goods and services tax if acquiring assets through a share sale.

• Shareholders: it may be difficult for purchasers to persuade a sufficient proportion of shareholders to agree to a sale.
• Risk: purchasers will take on sellers’ existing liabilities and obligations.

This involves a purchaser buying specific assets owned by another company, such as buildings or patents.

• Flexibility: the flexibility to acquire only the assets that compliment a purchaser’s existing business can result in a transaction that is more financially efficient.
• Valuation: valuation may be less subjective as intangible assets such as customer loyalty need not be considered.
• Due Diligence: due diligence relating to specific assets may be quicker and easier to conduct than firm-wide investigations.
• Risk: it is less risky in the sense that a purchaser has a lower risk of taking on unforeseen liabilities.
• Tax: tax law in the UK enables the market value of assets purchased to be offset against tax, even if the purchaser paid less than the market value.

• Control: purchasers will not gain full control over the entire company and may thus fail to benefit from any employees or internal knowledge and processes that may have helped to facilitate efficient and effective utilisation of the assets.

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By Jake Schogger - City Career Series