The Disadvantages Of Company Acquisitions

Continuing on from our last article ‘A Guide to Company Acquisitions’, we continue to talk about acquiring a business through purchasing shares. We mentioned in our previous article that there are several reasons why companies seek out acquisitions, including gaining access to new business or technology and the benefits. This time however we talk about the disadvantages and complications that are associated with an acquisition of shareholdings.

Liabilities

When attempting to obtain a current or target business through an acquisition of shares then the buyer also has, in some cases, the misfortune of inheriting all of the target businesses liabilities and contractual agreements that are in place.

Pre-sale re-organisations

A pre sale reorganisation occurs when the some of the target acquisitions assets are not included in the sale. In this case the purchaser will be required to strip out these assets before the share acquisition takes place. This can be a complicated process, and may not be commercially accepted prior to the acquisition of the business.

Tax disadvantage

The acquisition of a business through the purchase of shares also incurs some tax disadvantages. The main disadvantage here is that capital gains allowances are not applicable when purchasing a company through an acquisition of shares. Furthermore the existing taxable assets of the business are all based around the historical trading data of the company and are often noted in the deferred tax liability provision. The buyer usually purchases the assets of the target with a base cost on capital gains tax.

Financial Assistance

In 1985 an act was passed that prohibits a company purchasing a target company through a share acquisition from receiving any financing help from the company they are purchasing in the form of a loan. This included granting security over the assets.

Transfer restrictions

Some difficulties could be encountered during the acquisition with regards to a restriction in place for transfer of the target company’s articles of association.

When you are Selling a Company it is always best to seek the advice of an expert. Rickitt Mitchell offer expert advice during exit planning and are able to help with any complex issues that may come with buying a business.