Examining the Purchaser’s Options in a Private Company Acquisition

19 September 2017

The Northern Ireland Economic Outlook (NIEO) from PwC has recently discussed the slow economic growth in the region and has suggested that “a combination of decelerating consumer expenditure, lacklustre business investment and Brexit jitters,” may contribute to further economic deceleration.

Examining the Purchaser’s Options in a Private Company Acquisition

Due to such pressures, private companies may be forced to consider acquiring another company (the “Target”) to remain competitive and engender growth in their own business. The Target may be well established in a particular market, presenting an opportunity for the purchaser to expand into new markets or perhaps consolidate their position in an existing market. A shrewd purchaser may see some value in a Target that is in distress. At the outset, the purchaser will have to decide the type of acquisition they wish to make; an asset purchase or a share purchase. As with any choice there are advantages and disadvantages to weigh for both.

The difference between the two types of acquisition are that an asset purchase is where the business is bought as a going concern and the buyer can select the assets to be included and excluded, such as the goodwill, employees, premises, trading stock, customer contracts and plant equipment. Whereas a share purchase is where the shares of the Target are purchased, all assets and liabilities remain with the company. Considering it is only the ownership of the shares that have changed, the company remains largely unaffected but there can be risks if proper enquiries are not undertaken in advance of purchasing the shares.

An asset purchase is more likely to be favoured by a purchaser keen to adapt during competitive pressures, as they will be in a position to “cherry pick” the assets which they desire and view as most valuable. They can exclude assets and liabilities that are a cause for concern, such as aged plant or bad debts, affording the Purchaser more flexibility. Whereas in a share sale, no such selection will be available and considering the shares will be purchased and the assets and liabilities remain “warts and all”, the due diligence process will be more extensive, and as a result this may have time and cost implications.

If there were difficulties with the Target in the past, an asset purchase affords the ability to make a “clean break” from that discourse. However, the disruption or lack of continuity may cause difficulties at the same time with certain customers and more importantly suppliers, as contracts will need to be transferred. This disruption or uncertainty will not be an issue during a share purchase, as the legal relationship between the Target and the third parties will be unaffected.

It is to be noted the purchaser will find it much easier to finance an asset purchase, as the assets, such as the business premises and plant, will be regarded as good security, where a Lender may be less willing to charge shares.

Yet no doubt, the biggest draw for a purchaser in respect of an asset purchase will be the tax advantages, for instance capital allowances may be available for qualifying expenditure on plant equipment, business asset rollover relief may be available and other such reliefs on intangible assets. The agreed purchase price will have to be apportioned across the various assets, and the purchaser may wish to apportion the largest value to those assets on which capital allowances, intangibles relief or other tax deductions are available. Although it must be noted that there are tax advantages to a share purchase for the purchaser as the stamp duty on shares (0.5%) may be less than the stamp duty liability on any property acquired as part of an asset purchase. In order to assess the most beneficial path forward, it would be necessary for the prospective purchaser to seek advice from their legal team and accountants, prior to agreeing Heads of Terms.

Rachel Toner is a Solicitor within the Commercial Property Department of Worthingtons Solicitors and can be contacted on 02890434015.

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