Acquiring a small company

[james2004]

Hi

I am considering acquiring a small company, this would be acquired by my business. Ive done no due diligence yet (early stages) but the company I am considering has no inherent value as it has no assets so its costing me a pound, I am acquiring contracts and knowledge. However I am concerned about some of the sharp tax practice im seeing in the accounts, my question is how liable would I be if I acquired the company and find tax issues etc.
Thanks

 

[Ozzy]

What is your appetite to risk?
I ask that because I have also purchased a business in the past for £1 and decided, based on my own risk assessment that the cost of legal counsel would be disproportionate to the value (to me). However I'm pretty sure if I'd had the same gut concern you're seeing I would have probably walked away if I'm honest...or invested in a solicitor to draft the appropriate SPA (share purchase agreement - I'm assuming it's a Limited company) with the relevant warranties in place to protect me.

Having said that, I do tend to walk away immediately when I see anything concerning no matter what the opportunity looks like. I have a quite low risk appetite when it comes to acquisitions.

 

[The Byre]

I am concerned about some of the sharp tax practice im seeing in the accounts, my question is how liable would I be if I acquired the company and find tax issues etc.

Define 'sharp'!

BTW, due diligence is (IMO) the FIRST thing I would do!

But more importantly - when you purchase a company, you acquire all of its assets and liabilities, including any tax obligations. In plain English, YOU carry the can!

 

[james2004]

Define 'sharp'!

BTW, due diligence is (IMO) the FIRST thing I would do!

But more importantly - when you purchase a company, you acquire all of its assets and liabilities, including any tax obligations. In plain English, YOU carry the can!

not as i would expect with NI etc, and some of the accounts don't make sense. I'm heading to DD next as i said its very early stage, but not acquired before so did want to know, as you said if I do indeed "carry the can"
Thanks for your help

 

[The Byre]

In which case, you should just buy the assets and stay as far away from this can of worms as possible.

 

[james2004]

What is your appetite to risk?
I ask that because I have also purchased a business in the past for £1 and decided, based on my own risk assessment that the cost of legal counsel would be disproportionate to the value (to me). However I'm pretty sure if I'd had the same gut concern you're seeing I would have probably walked away if I'm honest...or invested in a solicitor to draft the appropriate SPA (share purchase agreement - I'm assuming it's a Limited company) with the relevant warranties in place to protect me.

Having said that, I do tend to walk away immediately when I see anything concerning no matter what the opportunity looks like. I have a quite low risk appetite when it comes to acquisitions.

Low is the answer!. Interesting you state "warranties in place" what do these look like? Im heading to my accountants and solicitors but like to know before i go to far in this.
Thanks

 

[Ozzy]

Low is the answer!. Interesting you state "warranties in place" what do these look like? Im heading to my accountants and solicitors but like to know before i go to far in this.
Thanks

When making an acquisition you can have the selling sign a warranty that if X happens they cover Y. The solicitor will advise you what is and is not viable, and also remember a warranty is only worth what the seller can afford to cover.
If they sign a warranty to cover costs of a tax inspection for example, but can't afford it when it happens then the warranty isn't worth the paper it's written on.

 

[MyAccountantOnline]

Hi

I am considering acquiring a small company, this would be acquired by my business. Ive done no due diligence yet (early stages) but the company I am considering has no inherent value as it has no assets so its costing me a pound, I am acquiring contracts and knowledge. However I am concerned about some of the sharp tax practice im seeing in the accounts, my question is how liable would I be if I acquired the company and find tax issues etc.
Thanks

If it's a small company it's very unusual to see much, if any, detail in the accounts.

You'd generally acquire the full accounts and tax returns from the company as part of the due diligence.

What are your specific concerns when you say 'sharp practice' - do you mean tax evasion?

 

[Mark T Jones]

If they sign a warranty to cover costs of a tax inspection for example, but can't afford it when it happens then the warranty isn't worth the paper it's written on.

In my customary, chipper way, I'd add that the 'shape' of a warranty or guarantee is seldom the same when called upon as it was when they cheerfully signed it.

 

[IanSuth]

@Newchodge will be better placed than me to advise on this but you mention NI not being as you would expect

That makes me think staff and therefore TUPE - if you inherit staff in the purchase then that £1 can be very expensive if you inherit a lot of liabilities on that side. Make sure you know exactly what you are walking into with regard to their rights, length of service, contracts etc

 

[Lisa Thomas]

Is the company solvent?

 

[DontAsk]

Buy any IP or other assets that you want from the company and then cover the owner's costs for it to be wound up. If there's nothing owing there should be no objections.

 

[Clinton]

In which case, you should just buy the assets and stay as far away from this can of worms as possible.

You've mentioned this, @DontAsk has touched on it but the OP hasn't picked up on this point.

In any case, his first post says he's buying the business for the contracts. That would exclude an asset purchase.

That makes me think staff and therefore TUPE

It looks like a purchase of shares, not assets, so TUPE is not relevant.

I'm heading to DD next as i said its very early stage, but not acquired before ....

Then you've no idea how to do DD. Don't kid yourself. You'll get slaughtered! Employ someone who knows what they're doing.

But if it's a small company - say under £1m in turnover - the game ain't worth the candle especially if there's potentially some dodgy stuff in the background. I would budget £10K to £30K for proper legal advice and the Share Purchase Agreement (excluding legal DD and accounting DD). Don't be tempted to use an SPA template from the internet.

If you don't have that kind of money to throw at your £1 deal then my advice, as someone who does know a little about acquisitions and stuff, would be to not go ahead!

 

[The Resolver]

, my question is how liable would I be if I acquired the company and find tax issues etc.
Thanks

To answer the initial question, the corporate veil which generally protects Directors from becoming liable for the company's debts has been pierced in recent years especially in relation to tax liablities.. In addition there is in any event no protection in cases of proven fraud. You may be protected on day 1 as not being a Director at the time of the conduct in question but if you have good reason to suspect improper management of tax/NI (either comin up on DD investgations or once begin to manage the company then you become at risk if you do not investigate and report what found.

Time for a serious sit down talk with the seller raising your concerns, But as you are only buying for the contracts, negotiate a deal to buy them. (and any IP as @DontAsk and @The Byre say). Firstly establuish whether they are assignable by the seller and, if so, offer a commission on say revenue generated in first year or so- but leave him with his company

 

[Daybooks]

If you found tax issues with the Company then the Company would remain liable for them. Due your due diligence and obtain whatever warranties you feel necessary.