Assets Vs Shares

So you have found a pharmacy you want to buy but the vendor wants to complete the transaction by way of a sale of the company's shares. What does this mean?

Basically it means that instead of buying specific assets, for example: stock, property and the NHS licence (Goodwill) you acquire the whole company and everything contained in it, including any liabilities (some of which may not even be apparent.) This is quite a common method of transfer of ownership but there are a few issues, of which you should be aware, so that you avoid any unpleasant surprises.

Sale of Assets

From the purchasers' point of view, the preferred method of completing the transaction is usually a simple transfer of assets. In other words you buy the goodwill, fixtures and fittings, the lease to the premises and the stock in the pharmacy. You may have the opportunity to buy the freehold of the property instead of a lease.

The value of the goodwill is relative to the sales and profitability of the pharmacy and can be calculated with reasonable accuracy. (See the section on Goodwill valuation.) The value of the fixtures and fittings and the lease is usually a nominal amount and included in the figure for goodwill.

The sale contract itself may apportion an amount to each. e.g. Supposing the goodwill value is agreed at £375,000 to include fixtures and fittings and the lease. On the contract the figures may be apportioned: Goodwill £340,000; Fixtures & Fittings £25,000 and Lease £10,000. Any such a split should of course be realistic and is agreed between the parties after advice has been obtained from your accountant or solicitor.

The stock is valued on the day of completion usually by an independent stocktaking firm. There is no reason, however, why you should not employ two stock takers: one acting for each party. Obviously the cost will be higher than if you shared one but this may be a small price to pay if there is likely to be any disagreement or dispute regarding the stock.

If you are buying the freehold then a property valuer should independently value it.

Sale of Shares

If the current owner trades as a limited company he may state that the sale will be by way of a sale of the shares in the company, rather than simply the assets. This can be a more advantageous method of sale for the vendor, as far as tax is concerned for the following reason:

If a company sells an asset such as goodwill at a higher price than was paid for it, then the company will probably have to pay Capital Gains Tax on part of the profit. When the owner withdraws the cash proceeds from the company he will then have to pay income tax on the withdrawal. So it can be seen that tax is effectively being paid twice on the same transaction, I.e. the sale of the pharmacy.

If the shares of the company are sold instead, then tax is only paid once now, with the tax payable by the company on the sale of the assets, being deferred until those assets are actually sold out of the company. One issue to bear in mind is that if you acquire the pharmacy through the purchase of the company's shares, then you will probably want to sell it the same way when the time comes, otherwise you will be the one who pays the tax twice.

However, the transaction itself is much more complicated than a simple asset purchase, as once you complete the transfer of shares you assume responsibility for the whole company including any actions relating to before you took ownership. So if the Inland Revenue or Customs and Excise mount a tax investigation the next day, you will have to deal with it and if there are found to be any discrepancies, you will be responsible for any financial recompense.

Due Diligence

Therefore, to ensure that you are fully aware of what liabilities you may be acquiring, it is necessary to employ a good firm of accountants to undertake a 'Due Diligence' investigation. This Due Diligence will investigate the financial soundness of the company and ensure that all the correct questions are asked and more importantly, that correct answers are received. The vendor will be asked to provide warranties to you on any questionable issues so that you have some comfort. However these can sometimes be difficult to enforce at a later date, particularly if say, the vendor has emigrated.

A share purchase transaction is further complicated where you need to borrow money to complete the transaction but where the only security available are the assets owned by the company.

This arises because it is against company law for a company to assist in the purchase of its own shares. This includes the pledging of company assets as security for a loan taken for the purpose of buying the shares.

Through the formation of a second company and a process of 'hive up' of assets from the acquired company into the new company, it is possible to complete the transaction whilst satisfying the requirements of the Companies Acts. This does require the services of a solicitor who is well versed in company law, working in conjunction with the accountant undertaking the Due Diligence.

Summary

If you purchase the shares of a company you become fully responsible for that company including any liabilities that might arise from actions undertaken in the past by the previous owner. You should employ an accountant and a solicitor who are both well versed in company law and to cover these additional costs, it is prudent to budget a sum of c. £20,000 for professional fees. The actual cost will depend upon the complexity of the transaction.

If you purchase the assets - that is all you are buying. It is up to the vendor to ensure that all his creditors and any other liabilities are cleared. Importantly, you as the new owner of the business are not responsible for anything that occurred under the previous ownership. An asset purchase is almost always the preferred method. For a first time buyer it is really the only option due to the additional cost in professional fee's.