Summary
- An acquisition lets you keep both companies’ legal identities while the target comes under your ownership, unlike a merger which combines them into one entity.
- Due diligence on the target’s financial statements, existing disputes and CMA merger thresholds should happen before you agree a price.
- How you structure the deal, as a share sale or an asset sale, determines what liabilities and employee obligations you take on.
- This article explains what UK business owners should check when acquiring another company.
- LegalVision’s business lawyers specialise in advising clients on business sale and purchase transactions.
Tips for Businesses
Before you sign, verify the target’s financial statements independently, agree the deal structure (share or asset sale) based on liability exposure, and check for open disputes or CMA thresholds that could delay completion.
An acquisition is where one company buys a majority stake in another, so the target keeps its legal identity but comes under new ownership. This differs from a merger, where two businesses combine into one entity. Before signing anything, you need to assess the target’s finances, structure the deal correctly, and check for competition or dispute risks that could affect completion. This article will explain some key points to look out for if you are acquiring another business, and it will touch on some considerations for how to analyse a target company.
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What is an Acquisition?
A company acquisition is where one company acquires a majority stake in a target company. Doing so essentially ‘buys out’ or takes over the target company. Being a majority shareholder in a company means that you can make certain decisions without the consent of all of the other shareholders.
As mentioned, an acquisition can be a great way of expanding an existing business. It can save you time and help you gain valuable assets.
What Should I Look Out For?
If you plan to acquire another business, you should first set out your business strategy and goals. This can help you identify some characteristics of the target company you are looking for. You may look for some of the following qualities.
How the Acquisition Can Grow Your Brand
Developing a brand is an essential aspect for most small and medium-sized businesses. Looking for a target firm that has a positive impact on your brand can help your business reach new consumers in the long term.
Financial Statements of the Target Company
As part of the due diligence process, you will want to make sure that you have thoroughly surveyed the financial statements of the target firm. This will include their assets, liabilities, and cash flow. Furthermore, this can also include the ongoing cost of running that business.
Valuation and Deal Structure
Another critical aspect of acquiring a business is determining how much the target company is worth and how the deal will be structured. The valuation is not always straightforward and often involves a combination of methods, such as analysing earnings, market comparisons, and asset values. It is important to ensure that the price you pay reflects both the current performance of the business and its future growth potential.
In addition to agreeing on a price, you will also need to consider how the acquisition will be financed. This may involve using existing cash reserves, taking on debt, or issuing shares in your existing company. Each option carries different levels of risk and can impact your business’ financial stability.
The structure of the deal can also affect tax obligations and legal responsibilities. For example, you may choose to purchase shares in the company or acquire specific assets instead. Each approach has different implications, particularly in relation to liabilities and employee obligations.
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Share Sale vs Asset Sale: What You Inherit
Deal structure has a direct effect on what liabilities you inherit. In a share sale, you acquire the company itself, so you take on all existing liabilities, contracts and employee obligations under TUPE, even ones you have not identified yet. In an asset sale, you choose which assets and contracts transfer, leaving most historic liabilities with the seller. This makes asset sales lower risk for buyers, but they can be more complex to negotiate, since contracts, leases and licences often need individual consent to transfer.
Tax treatment also differs. Share sales usually attract stamp duty on the purchase price, while asset sales may trigger separate tax charges on individual assets, including property or goodwill. If the target holds sector licences, regulatory approvals, or key customer contracts with change of control clauses, an asset sale can also let you avoid renegotiating terms that only apply to the corporate entity. Deciding between the two early, before you finalise valuation, changes how you price the deal and what warranties you need from the seller.
Deciding between the two early, before you finalise valuation, changes how you price the deal and what warranties you need from the seller.
Company Culture
If you are buying another business and planning on taking on some of their employees, it is good practice to check if your two companies have a cultural fit. You may want to examine whether the target company’s employees hold the same values as your employees.
You will also want to examine whether taking on the target company’s employees will create significant overlaps with your business. If so, you may have problems finding a role for all of their employees, and if you cannot, you may have problems ending their contracts.
Potential Legal Issues
Potential legal issues can also complicate the acquisition process and make the target company less desirable.
Legal issues can include competition law concerns about the acquisition. The Competition Markets Authority (CMA) is the UK regulatory authority that looks at mergers and acquisitions and whether they raise any competition law concerns. It is possible to contact the CMA if you are considering acquiring another business, and they will be able to let you know if your acquisition raises any potential problems.
Similarly, the target company may be in dispute with other businesses. This can hurt their cash flow in the long term and their overall brand. However, on the other hand, the dispute could be in their favour and may not be something to worry about.
Key Takeaways
As a business that is looking to acquire a target company, you must look out for several key points in the business you are looking to acquire. This includes the benefit that the acquisition can bring to you, the financial statements of the target company, and any potential legal issues that could come. If you are acquiring another business, it is usually a good idea to seek professional legal advice from an early stage.
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Frequently Asked Questions
What is an acquisition?
An acquisition is when one company buys another. Both companies usually keep their legal structure as a result of an acquisition.
What is a target company?
A target company is a business that you may want to attempt to acquire. An acquisition does not always require the consent of the target firm.
What is the difference between a share sale and an asset sale?
In a share sale, the buyer acquires the company and inherits all its assets, liabilities and obligations. In an asset sale, the buyer chooses specific assets and contracts, leaving most existing liabilities with the seller.
Do I need to notify a regulator before acquiring a UK business?
You may need to notify the Competition and Markets Authority if the target’s UK turnover exceeds the relevant threshold, or if the deal meets the share of supply test. Some sectors also require notification under the National Security and Investment Act.
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