There are many aspects to be considered when buying a particular business to ensure that you are making the correct (and hopefully profitable) decision.
In the commercial world transactions for the acquisition of a business takes the form of either a sale of business agreement or a sale of shares agreement. The transactions are distinct from each other and have different legal consequences.
Purchasing a business means that you are acquiring ownership from an individual or a company of assets which generates an income as well as liabilities (debts) which were incurred in generating that income. Generally, the seller will be liable for all debts of the business until take over by the purchaser. The sale may also include aspects regarding contracts entered into with suppliers and customers, intellectual property rights (designs or trade marks), accounts receivable and cash in the bank.
Purchasing shares in a company means that you are acquiring ownership of a legal entity which has separate legal personality and which owns and operates a business (or several businesses). The purchase of shares in a company will include all the debts incurred by the Company before the shares are transferred (i.e. suppliers, SARS, or third parties). This is generally why purchasers usually insist on a proper due diligence investigation into the affairs of the company concerned.
A sale of business agreement may be more appropriate if there is uncertainty about undisclosed liabilities, if all shareholders of the company are unwilling to sell their shares, or if the company conducts more than one business.
A sale of shares agreement may be more appropriate if important agreements are entered into by the company (i.e. license or supply agreements) which are incapable of transfer, the shareholders of the company insist on selling their shares rather than selling the business out of the company, or tax considerations would be more favorable.
It is always advisable to obtain comprehensive legal and tax advice to avoid unforeseen and unwanted legal consequences after acquiring your business.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)