In our last article where we began our 'A Guide to Company Acquisitions', were we spoke about the advantages of targeting and acquiring a company through an acquisition of shares, we continue with our next instalment. Here we continue with the disadvantages and complications that are often associated with acquiring a business through an acquisition of shares and shareholdings.
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
If all of the selling company's assets are not included in the sale then the purchaser will be required to strip these out before the share acquisition. This in itself can lead to complications as it may not be commercially acceptable leading to an acquisition of the business.
Tax disadvantage
The acquisition of a business through the purchase of shares also incurs some tax disadvantages. The main disadvantage here is that capital gains allowances are not applicable when purchasing a company through an acquisition of shares. Furthermore the existing taxable assets of the business are all based around the historical trading data of the company and are often noted 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
Some difficulties could be encountered during the acquisition with regards to a restriction in place for transfer of the target company's articles of association.
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
If all of the selling company's assets are not included in the sale then the purchaser will be required to strip these out before the share acquisition. This in itself can lead to complications as it may not be commercially acceptable leading to an acquisition of the business.
Tax disadvantage
The acquisition of a business through the purchase of shares also incurs some tax disadvantages. The main disadvantage here is that capital gains allowances are not applicable when purchasing a company through an acquisition of shares. Furthermore the existing taxable assets of the business are all based around the historical trading data of the company and are often noted 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
Some difficulties could be encountered during the acquisition with regards to a restriction in place for transfer of the target company's articles of association.
About the Author:
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.
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