Regardless of the size of your business, whether you are an SME or a PLC, there is always room to grow and develop. Company acquisitions are an efficient way of expanding your business but if not done correctly with both legal and financial due diligence, the acquisition could go horribly wrong. The following our top 10 legal tips for acquiring a company:
1. Consider the business of the company you want to acquire
Acquisitions should be made of competitors or companies who have similar product ranges or who offer the same services. This is because they will increase the purchaser’s customer base and will be able to offer the purchaser additional facilities which would be more expensive to develop from scratch than they would be to acquire.
2. Who will pick up the costs if the deal fails
You should be aware that if the deal falls through it could become very expensive. It would be sensible to agree with the vendor to pay for a percentage of the costs if the deal collapses; particularly it comes down to the due diligence.
3. Consider whether you just want to acquire the shares of the company or its assets
This decision will usually be based on the subsequent tax implications. For example, tax losses in the acquired company can often be utilised and off set whilst there could be stamp duty considerations when land and buildings are being purchased.
4. The target company’s liabilities
A purchaser should be aware that it could become responsible for the target company’s liabilities and should include this in its forecasts and valuations (see below).
5. Ensure that you have had a thorough valuation carried out
It is vital to ensure that a valuation has been made of the business you are acquiring including taking tax advice (considered in more detail below). It is important to look at the target company’s customer book as well as its assets and liabilities. Financial due diligence should be conducted by the acquirer’s accountant. Ultimately the purchase price could come down to how much the buyer wants to buy and the seller wants to sell.
6. Give careful consideration to the method of payment
Think about the method of payment. Would you prefer to acquire the business by way of shares or cash? Cash is probably the most common method of acquisition, although care should be taken to ensure that it will not have an impact on liquidity. Should payment or part if it be deferred ? A buyer should be careful about issuing shares when acquiring a company as this could dilute the controlling position in the company that is being acquired.
7. Beware of unforeseen costs
Acquisitions that fail often do so because of the business not performing as well as it was expected to do so. This could be because of increased costs or because the expected cost savings do not materialise.
8. Consider the target company’s employees
If it is just the shares of the target company that are being acquired then the employer does not change and therefore much thought does not need to be given to this area. However, if assets are acquired then TUPE regulations will as the employment contracts of employees will be transferred to the acquiring company which could have employment law implications such as redundancy and unfair dismissal. Employment contracts should also be considered to check existing restrictive covenants.
9. Retention of management
An acquirer should consider employing / retaining some of the seller’s management in some shape or form (usually on fixed term contracts) as this will allow for the smooth running of the business; particularly through any transition period.
10. Tax implications
Tax issues are too complex to consider in detail, but a buyer should be aware that the main tax issues relate to whether shares or assets are being acquired and what reliefs are available. The main taxes that become due are VAT, stamp duty, CGT and corporation tax. It would be wise to obtain tax clearances from HMRC and a tax covenant from the seller indemnifying the buyer against undisclosed tax liabilities.
I wish you every success if you are considering buying a business. I would be delighted to speak with you if you are choosing a solicitor. This page on our site may also be of use to you.
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