Small businesses can usually be sold and purchased in one of two ways, Share Purchase or the purchase of Goodwill and Assets (sometimes simply called an Asset Purchase). In most cases the acquisition of a limited company is best achieved by the purchase of shares. For an acquisition of shares then you would also inherit the debts and liabilities of the company as well as the assets of the company because both assets and liabilities of the company will attach to those shares. However, it could also be possible within the share purchase agreement for the liabilities not to be transferred with the company.
In a transaction which is structured as a purchase of assets as opposed to a purchase of shares, it is entirely possible for the assets of the business to transfer without a corresponding transfer of the debts and liabilities of the business (also, of course, all sole trader and partnerships will be transferred as Asset Purchases). This can be achieved in many ways but most commonly by the seller being responsible for the debts and liabilities of the business prior and up to the transfer point and the buyer being responsible for the liabilities of the business from the transfer point and beyond. In almost all cases completion accounts will be prepared and agreed particularly in relation to work carried out prior to the transfer but not billed.
A well-advised vendor (and his/her broker or agent) would have some idea whether or not his business is being sold as Shares or Asset sale. Sadly, in my experience, many vendors and brokers are not well advised. The rule of thumb is that a limited company will be sold as shares but this may be influenced by the vendor's tax position or other business or balance sheet issues. Some buyers may not be keen on acquiring shares as they could come with all manner of historical liabilities, hence the need for rigorous due diligence. However, the sale/acquisition of shares is often the most practical and seamless method of transfer for operational reasons. Supplier and customer accounts all remain in the company name, the bank accounts can usually be transferred/operated by the buyer, and all leases and finance commitments remain in place - it is simply the ownership of the company that changes.
For the sale of a sole trader or partnership the transfer may not be so simple. The buyer will need a new bank account and VAT number, will need to transfer all supplier accounts to his/her name (or company), the property lease(s) will need to be assigned, as will any other leasing or finance arrangements. Often for vehicles or equipment the leasing or financing arangements will need to be completely redrawn. However the sale of a sole trader is simpler from a legal and due diligence perspective.
So if you are selling or buying a limited company take advice from your broker, your accountant and possibly, your solicitor as the best method of disposal/acquisition. If you are buying or selling a sole trader or partnership there is no choice to be made as to the method of disposal but take careful advice all the same.
Keith Green - selling businesses and advising SME business owners since 1997 and still enjoying it.
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