We often hear about big business mergers and acquisitions in the news, with Virgin Media and O2 merging earlier in 2020 and online fashion retailer Asos acquiring Topshop and Topman last year.
But what about small and medium size business acquisitions?
In this article, Karen Edwards provides advice for companies looking to acquire another business; looking at how acquisition agreements work and the terms included…
What is a business acquisition?
In the case of sole traders and partnerships, both of which have no shares, acquisitions are achieved by the purchase of a company’s assets.
What is an asset acquisition?
This is known as a ‘asset acquisition’. The ‘assets’ will include physical assets, such as stock, property, equipment and vehicles and also intangible assets, such as goodwill and intellectual property rights.
The Sellers will receive the sale proceeds personally and will be responsible for ending all contractual arrangements which are not assigned to the buyer and will remain entitled to receive any monies owed to the business and responsible for any liabilities owed by to the business up to the point of completion.
It is also possible for a Limited Company to dispose of its assets, when this happens the purchaser takes only the assets and the purchase proceeds remain within the limited Company until it takes steps to distribute these to its shareholders.
What is a share acquisition?
Usually in the case of limited companies acquisition refers to an individual or company purchasing the majority shares of another company that operates a business. This is known as a ‘share acquisition’.
This article will predominantly focus on share acquisitions in limited companies.
How does an acquisition work?
An individual or company which purchases more than 50% of the issued share capital of another company becomes the majority shareholder.
The majority shareholder has a controlling share and can make decisions, such as appointing new Directors to form a new management team and passing shareholder resolutions regarding the newly acquired business.
They will not require the consent of minority shareholders to make most decisions.
If the majority shareholder is a company, then, together with the target company, they will form one group, being holding company and subsidiary.
What happens during an acquisition?
During a share acquisition, a purchaser will usually appoint a new board of directors to manage the target company, but many of the essential elements of the Company will remain unchanged, for example:
- In a share acquisition, the acquired company’s employees will remain employed despite the new ownership of the business.
- The Bank account will continue to be operated by the Company, however, the original management team will be removed from the mandate and the new management team added in their place.
- The Company will remain responsible for all liabilities (including taxation) whether they relate to the time period before or after completion.
- Any real estate owned by the Company will pass automatically with the shares and therefore a stamp duty charge on real estate will not be triggered, however there will be a stamp duty charge payable on the shares.
Since the purchaser will become responsible for all liabilities of the Company, it is vital that a full due diligence exercise is undertaken as part of the acquisition process.
What are the benefits of acquiring a company?
- Your company may increase its market share
- You’d also acquire quality staff
- Your company could enter new markets
- You’d gain access to the acquired company’s assets and facilities
- Your company can reach a new customer base
- Increased company growth
What is an acquisition contract?
An acquisition contract (or agreement) is a legally binding contract which is used for an acquisition.
The terms of an acquisition transaction will be set out within this contract.
What should be included in an acquisition contract?
The following terms will likely/should be included in the contract:
- A clear description of the transaction, including full details of the target company and any existing subsidiaries;
- Details of the amount payable, any adjustments to be calculated post completion and the payment schedule;
- Any conditions to be fulfilled between exchange and completion;
- Representations and Warranties (assurances regarding the business and any potential risks);
- Indemnities against specific risks identified in due diligence.
What documents are needed for an acquisition?
Documents that may be needed for an acquisition include, but are not limited to:
- Share Purchase Agreement
- Disclosure Letter
- Stock Transfer Forms
- Directors appointment/ resignation letters
- Sellers waiver of claims/ deed of no indebtedness
- Guarantee/ Debenture/ Loan Facility instruments
- Resolutions
- Waivers of pre-emption rights
- Board Minutes
How long does an acquisition process take?
A straight-forward acquisition for a small entity can often be completed within 6-8 weeks, however, more complex transactions can take several months.
It is important that purchasers consider this when arranging funding.
Do I need a solicitor to acquire a company?
Yes, both purchasers and sellers will require legal advice at all stages of the process to ensure that:
- All risks inherent within the target Company have been identified and mitigated,
- Funder requirements have been fulfilled
- A valid and binding completion has taken place with all appropriate filings made at Companies House.
Business acquisition solicitors
At Frettens, our bright team of Corporate & Commercial Solicitors can assist you in acquiring or merging with a business.
We’d be happy to assist you in this sort of transaction, or simply answer any questions that you may have following this article.
Call us on 01202 499255, or fill out the form at the top of this page, for a free initial chat.
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