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Improving Prospects for Business Acquisitions


Business owners and potential acquirers are currently finding better prospects for growth in the Thames Valley where recent surveys show greater confidence. With bank lending still difficult though, Rupert Wright, a corporate services lawyer with Charles Lucas & Marshall, says buyers and sellers need to consider creative and pro-active methods to reach a suitable deal.

Rupert Wright

Rupert Wright

The general rule is that buyers tend to favour an asset sale while sellers prefer a share sale.  The main advantage for the buyer of an asset sale is flexibility since the buyer can specify the assets it wishes to purchase and also lower the risk since the buyer does not acquire any liabilities it does not specifically agree to.

For sellers, the main advantage is that the buyer acquires the whole company and therefore they are able to dispose of all potential liability. A recent case involving Dragon’s Den star, Theo Paphitis, emphasised how important it is to minute all matters as he was able to show that he had the interests of the seller company in mind when he had to defend an action for fraudulent breach of his fiduciary duties.

With the current difficulty in obtaining bank finance, deferred consideration will be an important element for disposals.  Acting for the seller, one of the key factors is security, since the buyer will resist personal guarantees.  However, debentures can be considered both for the company being acquired and also for the buyer company.

Another element that must be considered in the current climate is earn-outs.  This can be particularly important when a major part of the revenue is dependent upon one or two major corporate clients or where there is concern from the buyer that the departure of a key member of staff may have a detrimental effect on future trading performance.

Earn-outs should also be considered where there are declining sales, perhaps caused by an owner being unwell or absent from the business due to family or personal reasons. Earn-outs can be a factor where a high price is being sought by the seller and the earn-out protects buyers in order to ensure that they only pay for real tangible profits rather than potential profits that fail to materialise.

A management buyout is often a suitable way of a seller disposing of a subsidiary or certain key assets to its management.  One unusual way of dealing with the management buyout is for the seller to make a payment to its management team to assist it with the purchase.  This will assist the seller with closure and other possible redundancy costs and might well be a suitable way of disposing of its assets.

In summary, in the current economic climate where business prospects are improving, creative and proactive solutions are available which can work to the interests of both buyer and seller.  However, legal advice should be sought at all times at an early stage.

For further information contact Rupert Wright on 01635 521212 or rupert.wright@clmlaw.co.uk

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Rupert Wright
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Rupert Wright

April 13th, 2012 at 3:01 pm