Buy right
You want to grow your business by acquiring another company but you’re worried that it could be a complicated and costly exercise. What are the key things to consider to ensure a trouble-free purchase?
Buy now
There might be a whole host of reasons why you think now is the right time to buy another company. It could be to,; increase market share, grow in the same or new markets or, reduce competition. Whatever the reason, you need to structure the deal carefully as both you and the seller will be keen to keep costs to a minimum - and often your strategies will differ. The structure will also influence the value of the business, what you’re buying (personnel, liabilities etc.) and the conditions of payment.
What are you buying?
The critical decision is whether to buy the trade and assets or the shares of the company. This apparently simple decision will dictate the whole structure of the deal and have important tax and legal implications that are summarised below:
| Trade and assets | Shares |
| Only buy the assets you really want | You get all the business even if you don’t want it |
| Don’t inherit the seller’s tax history | You inherit the seller’s tax history |
| Trade ceases - new contracts are needed | Business continues, no need for new contracts |
| Stamp Duty on most of the assets transferred | Losses are transferred to new business |
Tip. Combinations of the above are possible - but you’ll need the help of your accountant to minimise the tax implications.
Who pays the tax?
Generally, the seller will want to sell the shares in his company to benefit from taper relief on any capital gain. You will want to buy the trade and assets as any premium paid over the net asset value can be written off against your Corporation Tax bill.
Tip. The seller could only pay 10% tax on any capital gain if he sells the shares whilst you lose any Corporation Tax relief. So negotiate a lower price for shares than you would pay for the trade and assets. In the end it should all even out - if the seller won’t deal, walk away.
Valuing the company
It’s not easy to value a limited company and it’s likely to be an area of debate between you and the seller - especially if he holds all the shares! Common methods are based on; (1) the Net Asset Value of the business - normally used in a receiver sale scenario; (2) a multiple of operating profit - typical values are between five times for a traditional business to ten times for a high growth business; or (3)the future cash flows of the business discounted to reflect inflation and the cost of finance.
Note. Generally the price will be higher than the net asset value of the business and the excess is called goodwill - the “reputation” of the business. However, the business is only worth what you’re prepared to pay for it.
Payment terms
How. Finally, how you’re going to pay is an important part of the deal. There are three options - cash, shares or securities, a combination of both.
When. Also, when payment is to be made must be agreed. It could be that all of the payment is received on completion or some of the money could be deferred and payable at a later date.
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