Help buying a Ltd company

[John¥P]

Newbie question here and just wanting some help and advice before proceeding with paid for professional advice.

I’m currently the self employed owner of a leisure equipment hire business (3 years trading) and looking at buying a similar (17 years trading) business that is a limited company.

I’ve known the owner all the years he’s been trading and know the business very well.
I’m struggling on knowing how buying the Ltd business would work but here’s how I see it-

I buy the Ltd company for £40k me and my wife are appointed as directors.
Is the £40k used to but the shares (+assets) from the current shareholders before they resign as directors?

How is the cash that I buy the company with shown in the accounts and how do I get it back out, is it directors loan?

When I own the Ltd company it would need to buy my current assets (approx £35k) to be used by the company as I couldn’t carry on with a separate sole trader business doing the same as the Ltd Company. The Ltd company wouldn’t have the finance to pay for these straight away so could it be repaid over say 3/4 years. If so would these payments show on my tax return as capital gains?

Sorry if I’m rambling or as clear as mud but just trying to get my head around a few things before proceeding.

Thank you

 

[Mr D]

You are looking to buy the company from its owners. They get the money in return and can spend it on wine, women and song or waste it as they wish. So you do not have it in the company afterwards. Not your money any more, not the company money at any time.



Talk to your accountant about the multi year purchase.

 

[UK Contractor Accountant]

Is the £40k used to but the shares (+assets)

you either buy the assets and trade from the company or you buy the shares.

If you buy the shares the money does not go into the company bank - it goes straight to the shareholders in exchange for their shares.

 

[UK Contractor Accountant]

When I own the Ltd company it would need to buy my current assets (approx £35k)

you can transfer these to the Ltd company for a £1 if you want,

They are treated within the Capitall Allowances regime- speak to your Accountant about how this works.

 

[John¥P]

You are looking to buy the company from its owners. They get the money in return and can spend it on wine, women and song or waste it as they wish. So you do not have it in the company afterwards. Not your money any more, not the company money at any time.



Talk to your accountant about the multi year purchase.

Apologies I think I’ve worded it wrong. I know the current directors get the £40k but I was wondering how I show (or claim relief) on the £40k that I’ve invested.

As a side issue will the current directors be taxed on the £40k as profit or is there a more efficient way of them taking it?

Thank you

 

[John¥P]

you either buy the assets and trade from the company or you buy the shares.

If you buy the shares the money does not go into the company bank - it goes straight to the shareholders in exchange for their shares.

Thank you for that. Does this mean it’s almost as simple that in return for buying the shares I ‘own’ the company and all that goes with it (I know the company is it’s own entity etc) and basically the current directors can then walk away from it?

 

[Chris Ashdown]

Do you know fully that the company you are buying has no outstanding debts you will be responsible for say leased equipment and the like, claims for damages the old owner has not mentioned. You will be safer just buying the assets and not the company

Will the combined sales take you into vat registration if not already, meaning you may be more expensive to hire from

You need professional advice

 

[Clinton]

I’ve known the owner all the years he’s been trading and know the business very well.

No, you don't.

Come back when you've done a full due diligence and tell me that, and I'll say that you know the business a bit better now.

Apologies I think I’ve worded it wrong. I know the current directors get the £40k

No, they don't. The current shareholders get the money.

You seem so raw and clueless about all this that my advice to you would be to do nothing, nothing, till you've gone and obtained some professional advice. Nothing means not even talking to the seller about his business or about the sale!

On these small deals unless the buyer is willing to spend £20K to £30K in professional fees - a good accountant, a good M&A lawyer and a savvy business broker type person to provide general advice, negotiate deal and deal structure etc - they are likely going to screw up.

At the £40K purchase price most buyers would see it as overkill to spend £30K in legal fees. And they are right in that it's a lot of money to pay relative to the size of the deal.

If you want to know about buying shares vs buying assets - unlike, what you think, it's not a combo job, there's a difference between the two - I've written an article for you. Yes, just the small matter of deciding share vs asset purchase requires a knowledge of content that's as long as War & Peace.

Generally speaking, £40K deals are not worth doing. Any business "worth" £40K is probably worth £0 or, yikes!, even less than £0. If this price is what the seller proposed I'd walk away, the business is probably worthless.

 

[UK Contractor Accountant]

If it were me I would just make an offer on the leisure equipment, trading name + other assets of the business. The seller might have other ideas on structuring the deal.

Only you will know what the assets are worth.

 

[The Byre]

Thank you for that. Does this mean it’s almost as simple that in return for buying the shares I ‘own’ the company and all that goes with it (I know the company is it’s own entity etc) and basically the current directors can then walk away from it?

Pretty much - yes. All the regular liabilities and assets are now yours to have and to hold from that day forth!

The only problem with that assessment is that the assets are very unlikely to amount to £40k in true present-day value.

It sounds as if (big 'IF' here!) this guy is going to retire or similar. In that case, what would happen if he just closed the place down and held a fire-sale of equipment?

I cannot stress enough the importance of doing a full due diligence search and full credit report on this person, his wife, children, dogs, employees and anyone else associated with the company. If nothing else comes up, that can tell you a great deal about WHY he is really selling!

This brings me to another important point - WHY is this guy selling. Never mind the reasons he is saying he is selling. WHY is he really selling? I sold my company in 1999 because I thought that the whole trade publishing boom would burst - I was right. They bought in effect nothing. That whole market collapsed. Shortly afterwards, a friend sold his publishing company to a large PE fund for the same reason - and the same thing happened. 28 titles became five and they are thin and feeble shadows of what they once were!

And as @Clinton implies, buying the Ltd. can be a poisoned chalice. Heaven knows what liabilities and contracts are lurking in the books and other paperwork - some may even be unknown to the owner!

If it were me I would just make an offer on the leisure equipment, trading name + other assets of the business. The seller might have other ideas on structuring the deal.
Only you will know what the assets are worth.

This!

The risks of buying a whole Ltd. are greater than the small sum involved here. For example, that Ltd. could be hit with litigation for injuries incurred years ago and Gubbins (that's you BTW) will be carrying the can!

 

[John¥P]

Do you know fully that the company you are buying has no outstanding debts you will be responsible for say leased equipment and the like, claims for damages the old owner has not mentioned. You will be safer just buying the assets and not the company

Will the combined sales take you into vat registration if not already, meaning you may be more expensive to hire from

You need professional advice

It does look like buying the assets may be the smoothest option. I have a dormant limited company that was the same line of business from some years ago so I’ll look at that option with an accountant.

With regards to debt I know they claimed the £10k premises grant and £20k bounce back loan (he bought premium bonds with the bbl) and said that would be paid back before any sale took place.
I know the grant doesn’t need paying back but it’s taxable so that’s a probable issue.
Thank you

 

[John¥P]

If it were me I would just make an offer on the leisure equipment, trading name + other assets of the business. The seller might have other ideas on structuring the deal.

Only you will know what the assets are worth.

That is looking the better option, I was just thinking that with being an established Ltd with good accounts for so long may carry some clout going forwards. However as we won’t need to borrow, lease or take any debt on maybe it doesn’t.
The physical assets alone at bottom price are worth 85% of the investment. The customers, trading name etc are what’s really valuable to me. I helped this business set up all those years ago, know many of the customers and for instant cash flow long term hirers generate approx £1000 pm.
Thank you

 

[MyAccountantOnline]

If it were me I would just make an offer on the leisure equipment, trading name + other assets of the business. The seller might have other ideas on structuring the deal.

Only you will know what the assets are worth.

So would I

 

[John¥P]

Thank you

 

[Cloud Accounting]

You'll want some restrictive covenants in the agreement as well, particularly if you're only buying the assets. Nothing to stop previous owner continuing to trade under a similar name & trying to poach his old customers back.

 

[John¥P]

It does look like buying the assets may be the smoothest option. I have a dormant limited company that was the same line of business from some years ago so I’ll look at that option with an accountant.

With regards to debt I know they claimed the £10k premises grant and £20k bounce back loan (he bought premium bonds with the bbl) and said that would be paid back before any sale took place.
I know the grant doesn’t need paying back but it’s taxable so that’s a probable issue.
Thank you

No, you don't.

Come back when you've done a full due diligence and tell me that, and I'll say that you know the business a bit better now.


No, they don't. The current shareholders get the money.

You seem so raw and clueless about all this that my advice to you would be to do nothing, nothing, till you've gone and obtained some professional advice. Nothing means not even talking to the seller about his business or about the sale!

On these small deals unless the buyer is willing to spend £20K to £30K in professional fees - a good accountant, a good M&A lawyer and a savvy business broker type person to provide general advice, negotiate deal and deal structure etc - they are likely going to screw up.

At the £40K purchase price most buyers would see it as overkill to spend £30K in legal fees. And they are right in that it's a lot of money to pay relative to the size of the deal.

If you want to know about buying shares vs buying assets - unlike, what you think, it's not a combo job, there's a difference between the two - I've written for you. Yes, just the small matter of deciding share vs asset purchase requires a knowledge of content that's as long as War & Peace.

Generally speaking, £40K deals are not worth doing. Any business "worth" £40K is probably worth £0 or, yikes!, even less than £0. If this price is what the seller proposed I'd walk away, the business is probably worthless.

Thank you for such a detailed and informative reply, I’ll read the article next.

Very early stages at the moment, I’ve seen the books but without going through them with an accountant they mean nothing as I could be missing something that makes the deal a none starter.

I was pretty instrumental in setting the business up years ago before they turned limited. I’ve helped run it and stepped in many times over the years as our businesses are almost identical from the outside. If we weren’t business associates I’d say we where good friends but I keep the two separate. I understand what you’re saying and am 100% blind to anything hiding in the shadows.

Sorry again, I know I’m not great at words and explanations. The current directors are the shareholders so I was just classing them as the same.


This forum is great, I’m already thinking it’s just the assets I should be buying. Is there any benefit to buying the shares?

As I’ve said above I know the director well and a full return on investment shouldn’t take 12 months. One option as they are in no desperate need of money is to pay half in 6 months time and the balance at 12 from the companies profits (current directors suggestion). However structuring that deal would likely involve the fees you mention and look very messy as I have the cash ready to invest now.


Thanks again for the great advice.

(I've tried to reply to your individual points but as there's a link in your reply it's not letting me)

 

[Cloud Accounting]

If you do go down the share purchase route & there aren't many advantages of doing so, make sure you get full disclosure on all outstanding liabilities particularly lease agreements that wont be obvious from the accounts. Don't want to find you're having to pay for the previous owners wife's car for the next 3 years or you're tied into unwanted premisses etc.. You'd then want warranties from the previous owner that they've given you full disclosure & indemnities against any subsequent claims you might face (HMRC, Employee disputes etc..).

To get someone to do it property doesn't come cheap though, hence why for such a small transaction its often easier to purchase the assets.

 

[John¥P]

Pretty much - yes. All the regular liabilities and assets are now yours to have and to hold from that day forth!

The only problem with that assessment is that the assets are very unlikely to amount to £40k in true present-day value.

It sounds as if (big 'IF' here!) this guy is going to retire or similar. In that case, what would happen if he just closed the place down and held a fire-sale of equipment?

Bottom trade value would be circa £30k for equipment alone, sold as individual pieces to public would be going on for the £40k


I cannot stress enough the importance of doing a full due diligence search and full credit report on this person, his wife, children, dogs, employees and anyone else associated with the company. If nothing else comes up, that can tell you a great deal about WHY he is really selling!

This brings me to another important point - WHY is this guy selling. Never mind the reasons he is saying he is selling. WHY is he really selling? I sold my company in 1999 because I thought that the whole trade publishing boom would burst - I was right. They bought in effect nothing. That whole market collapsed. Shortly afterwards, a friend sold his publishing company to a large PE fund for the same reason - and the same thing happened. 28 titles became five and they are thin and feeble shadows of what they once were!

He is wanting to retire and has a couple of minor health issues. We've talked about me buying for the last 3 years but as the company makes more profit than the sale price over limited hours he keeps going for 'another' year and I just buy the odd piece of equipment from him. A family member deals with him and his property investments and knows more about his wealth than I do. I've been involved in the industry just over 20 years (with a couple of gaps whilst pursuing over interests) and it's always been strong. Due to lock down earlier in the year the business and industry has had the best year on record, I'm sure the recession will have a slight impact although previous downturns in the economy haven't done.

And as @Clinton implies, buying the Ltd. can be a poisoned chalice. Heaven knows what liabilities and contracts are lurking in the books and other paperwork - some may even be unknown to the owner!


This!

The risks of buying a whole Ltd. are greater than the small sum involved here. For example, that Ltd. could be hit with litigation for injuries incurred years ago and Gubbins (that's you BTW) will be carrying the can!

Thank you for another great reply "The Byre" my replies are just above as I can't seem to be able to quote and reply.

 

[The Byre]

Looks like you're all set and good luck! Keep us posted on how things pan-out!

 

[John¥P]

Looks like you're all set and good luck! Keep us posted on how things pan-out!

Thank you I will do. It's been really helpful joining here as now when I go to see the accountant and solicitor I'm a lot clearer and have a little bit better idea of how to proceed so hopefully save them some time trying to make sense of what I'm doing.

 

[Mr D]

Thank you I will do. It's been really helpful joining here as now when I go to see the accountant and solicitor I'm a lot clearer and have a little bit better idea of how to proceed so hopefully save them some time trying to make sense of what I'm doing.

Just remember, you do have the option of walking away. A deal benefits you - or its not worth doing.
In this there are 2 sides, you are on one not both.

 

[Clinton]

This forum is great, I’m already thinking it’s just the assets I should be buying. Is there any benefit to buying the shares?

I keep telling people here that a forum is not the place for these questions. You need to talk to a professional!

I'm not saying that because I don't know what I'm talking. I'm saying that because I do know what's involved and it's a lot more than you think.

That detailed article I put together on asset sale vs share sale doesn't cover half the story. Depending on individual cases, there may be other factors.

Based on what you've heard in this forum, you seem to think that buying the assets is what you should be doing.

Wrong!

What you should be doing is talking to someone who can explain the huge risks with buying assets - like the TUPE issue. Then, in an asset sale, there's the different tax treatment, for you, for the company being sold, for the shareholders of that company. And there are lots of things you lose in an asset sale, including existing contractual relationships, subscriptions, credit arrangements, social media accounts, payment platform accounts, all sorts.

This forum is not the place to get a clear picture on this question!

However structuring that deal would likely involve the fees you mention and look very messy as I have the cash ready to invest now.

No, there's almost no extra cost to building that structure in. The bulk of the fees a lawyer charges for the SPA (Share Purchase Agreement) is for all the rest - the indemnities, warranties etc. that have already been mentioned. And they'll charge a similar fee for an asset purchase as there are just as many issues there, different issues but still matters that need to be dealt with in the contract.

 

[Szymon Krzyzanowski]

I agree with Clinton in that the process of buying a company (whether trade & asset or a share purchase) is quite complex and therefore costly. Do not underestimate the importance of seeking a professional help from your accountant. Your accountant is insured to advise you on this: we are not.

This definitely requires a full due diligence to be carried out. However, I find that the cost of preparing Business Purchase Agreement (BPA) is usually slightly lower than SPA. Thats from my experience and I have worked with these deals for the last couple of years.

 

[Spur Support Services]

Buying a limited company is a share transfer. The purchase price of the share doesn't effect the limited company accounts. The previous owners account for a capital gain on their share sale (subject to any reliefs available). The cost price becomes your share purchase cost, to be used if you ever sell up.

Buying the trade from the limited company will introduce the value of the assets, liabilities and "goodwill" into your previously dormant entity.

With a transfer of a trade, you will have to change all legal documents, such as property and equipment leases to the new company. This may make this second option unpalatable.

As others have said due dilligence and sales/purchase agreement are key. You need to be satisfied that

• the assets are valued fairly,
• that all the liabilities are valued correctly,
• that the "goodwill" payment is a fair price to pay for the income that can be generated by the business when considering the current economic climate and future prospects
• that the business you are buying wasn't advantaged by synergies with any other businesses the previous owners had.

Whilst sale agreements can include warranties, these may be expensive to enforce. Consider performance related deferred consideration as an alternative (deferring paying for part of the purchase)

Good luck with considering your way forward. Ensure you enlist the right people for the right price to support you.

 

[John¥P]

Some great advice I’ve received here that’s been more than useful.
I had 2 hours with the accountant yesterday and he echoed much of what has been said here. Without this forum I would have been sat there looking fairly confused and like a rabbit caught in the headlights.
Will keep you updated.