Do you buy the business or buy the shares?

When looking to buy a company’s business enterprise there are often two options:

  1. Buy the business from the vendor company; or
  2. Buy the shares from the vendor company owner.

There are a number of considerations. If the business is purchased, then it is possible by agreement to have a clean “cut off” point where the business assets become the unencumbered property of the purchaser and the vendor deals with the debts and liabilities of the business incurred up to the “cut off” point. Any variations such as collection and accounting for monies owned to the business prior to the “cut off” point can be dealt with by the agreement.

Likewise there need to be provisions dealing with termination or continuation of staff arrangements, use of names, web sites, telephone and communications used by the business, transfer of leases and long term supply contracts etc to ensure preservation of goodwill and continuity of the business.

There is generally the need to change bank accounts, advise suppliers of the new ownership and enter into new supply agreements, deal with customers etc, so the process is reasonably intensive at and around the “cut off” point.

The principal advantage is that the purchaser starts off with a clean slate.

If the decision is to buy the shares, the initial inconvenience is generally less. The company ownership of the business continues with new management but all of the ongoing aspects of the business operation can largely be left in place, subject to any necessary consents from suppliers and landlords.

The real potential downside for a purchaser is that any company liabilities remain with the company and therefore indirectly may adversely affect the value of the shares benefit to the purchaser. Disclosed liabilities are not so much a problem as those which are unknown which relate to previous trading but which surface after the change of share ownership.

The usual way in which that risk is covered is by comprehensive warranties by the share vendor in the agreement but those usually contain a maximum liability cap and a time limit on making claims. Any warranty is only as good as the substance of the party giving it so there are risks above those applying to a business purchase which always need to be weighed up against the convenience of leaving the existing business structure largely in place.

The final decision is a matter of negotiation between the parties and then an agreement which adequately deals with the relevant issues, so there are no unexpected surprises for the purchaser.

The information contained in this paper is necessarily of a generalised nature and specific advice should be sought in relation to any particular situation. Further information and assistance in relation to this article can be gained by contacting senior commercial lawyer Kevin House.