This is the second article surrounding company acquisitions and the advantages and disadvantages associated with acquiring a business through an acquisition of shares. In this article we mention some of the many disadvantages associated with this type of company acquisition, which continue on from our previous instalment ‚A Guide to Company Acquisitions‘.

Liabilities

There are some liabilities involved with an acquisition of shares. When attempting to purchase a target company you may encounter some existing liabilities, these can include but are not limited to inheriting existing contractual agreements and the possibility of inheriting all of the existing debts and other liabilities.

Pre-sale re-organisations

A pre sale reorganisation occurs when the some of the target acquisitions assets are not included in the sale. In this case the purchaser will be required to strip out these assets before the share acquisition takes place. This can be a complicated process, and may not be commercially accepted prior to the acquisition of the business.

Tax disadvantage

There are also some tax disadvantages to a share acquisition, the main point here being that capital allowances are not available when purchasing a business through share acquisitions. Also, the taxable assets of the company are based on historical data and any differences in the data can be viewed in the deferred tax liability provision. The buyer usually purchases the assets of the target with a base cost on capital gains tax.

Financial Assistance

The 1985 companies act prohibits a company purchasing shares from receiving financial assistance during the acquisition from the company selling the shares. This includes a company granting security over its assets for the purpose of a loan to the share purchaser to finance the actual acquisition.

Transfer restrictions

During the acquisition there may be a restriction in place regarding the transfer of the target company’s articles of association. There also may be some other outstanding obligations, such as contracts etc which are in existence that can lead to some difficulties during the acquisition.

When you are Selling a Company it is always best to seek the advice of an expert. Rickitt Mitchell offer expert advice during exit planning and are able to help with any complex issues that may come with buying a business.