Advice on buying a company

A

anan

Registered User
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Folks,

I am trying to buy part of a small business. It has two partners and one of the partner is trying to sell it to me. When I looked at the books and their last annual return, I see they have made a loss of about 50K last year. Though they say they are doing well now, I see from current books that they continue loosing something in the order of 5 grand a month. All in all, not a healthy setup.

But I am still keen to get this knowing well the status. This is where I am looking for some guidance. I know I have to speak to my solicitor, accountant etc., but just looking for some preliminary advice.

(1) Would it be absolutely foolish to venture into this kind of deal or does this happen all the time ? i.e. Do people buy loss making business ?

(2) If so, If I become a director by buying 50% of the share, would that mean that I am taking all their liabilities including any bank loans, debts to creditors etc.,

(3) Would it be better to ask them to close that company, start a new one with a fresh slate and become a partner with the other person who wants to stick on in the new company? Would that mean that I carry no liability from the previous company and all I need is to tackle the 5 grand loss per month.

(4) What are the things that I need to ask them to clear before I proceed with the next step ?

Any tips would help me to have a better discussion with the seller and my accountant. Thanks in advance.
 
1. because the losses can be easily stopped (generally when merged with another business) and the loss can be written off against tax

2. if the bank or any other creditor ask you to personally guarantee any debt or (common enough) building lease then yes

3. depends on the liabilities, if you owed people money who the new company would rely on they might not supply you if they only got a % of their debts in a liquidation

4. first thing springs to my mind is why is one guy selling?
 
There needs to be a realistic business plan which shows how they will start making profits and how they will pay off accumulated debts including loans from cashflows.

You, personally, have to have something to add to the business. Don't buy it because you have recently lost your job and have some capital available. A lot of people get into bad businesses this way.

If you have something to add to the business, can you do it on your own? What is the advantage of buying shares in a business which is losing money?

Has the company net assets or is it insolvent? If it's insolvent, it would be risky getting involved as you might find yourself personally liable for acting as a director of an insolvent company.

Do you know the other partner and does he welcome you into the business? This really is essential. If this condition does not exist, walk away.

It's not so easy to set up a new company and walk away from the old one. The directors may be made personally liable for the debts and such legal action might keep them very busy for the next 5 years when they should be focussing on turning the business around. And customers or suppliers who lose out might get annoyed at this.

A variation of the "walking away" might be to do an informal scheme of arrangement whereby big creditors agree to take a reduction in the amount outstanding. I am not an expert in this, but I doubt if the Revenue would participate, so if they are the main creditor, then this is probably not worth pursuing.

Brendan
 
Thanks.

Just to answer some of your questions....

In fact both partners decided to sell the business. They have found a buyer for one share and the other share is being offered to me.

I do not know the other partner who is buying the 50%. Have his details and am planning to meet him sometime shortly. As per my business plan which I have drawn up after getting as much details as possible, I should make a break-even in the first 6 months. I know it is not easy. The plan could have an early demise once I meet the partner.

I am not certainly considering takng this decision because I don't have a job or anything of that sort. In fact, by all means I might not go ahead with this if it turns out to be not workable.

Brendan, I did not mean 'Walking away' in the literal sense. As a potential buyer I was wondering if I could buy off something clean without carrying their past history even if it means paying a small premium to sort things straight.

For example 'Can I register my own company with the new partner, just buy off the assets and the lease of the premises from the seller and start off clean?. I understand that customers / creditors will still see us as 'them' for a while which is a goodwill (or the lack off as the case may be) issue. But legally we are a new entity and none of the original directors are part of this new entity. Yes, we can't use the same business name but it doesn't affect me as it is more of a local business and name really doesn't matter.

Anyway, many thanks folks for your valuable inputs. Time to do some more homework.
 
anan said:
Brendan, I did not mean 'Walking away' in the literal sense. As a potential buyer I was wondering if I could buy off something clean without carrying their past history even if it means paying a small premium to sort things straight.
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So what would you be buying, why no just set-up a new company, that does the same thing yourself.
 
You could set up a new company and compete with the old compay.

You could use this to buy assets from the other company.

You may have obligations to its existing employees under what is known as the TUPE rules. Google or search Askaboutmoney for more.

Brendan
 
Are the two current partners going to set up again in competition.
They may bring customers with them.
 
Folks, Thanks for your reply.

I started with the normal process of buying off the company & business. But when I saw the debts and loans they had, I realised that it could take ages to bring this to a decent shape. That is when I thought about an alternative which is as follows :

I was thinking to setup a new company , buy off their lease and equipment + a premium as we will be using their established base. So we will start operating in the same place, same customer base, same staff, New name, New management.

I will ask the staff to resign from that company and join the new company. The cutover should be seamless. It would look like it is the same business as far as customers are concerned without any break. But legally this is a new company which will have no debts.

I am not buying the company with its bad history , but just buying the business, their experienced staff and the location which is popular with the customers.

Am I missing something ? I hope this is legal.
 
anan said:
Folks, Thanks for your reply.

I started with the normal process of buying off the company & business. But when I saw the debts and loans they had, I realised that it could take ages to bring this to a decent shape. That is when I thought about an alternative which is as follows :

I was thinking to setup a new company , buy off their lease and equipment + a premium as we will be using their established base. So we will start operating in the same place, same customer base, same staff, New name, New management.

I will ask the staff to resign from that company and join the new company. The cutover should be seamless. It would look like it is the same business as far as customers are concerned without any break. But legally this is a new company which will have no debts.

I am not buying the company with its bad history , but just buying the business, their experienced staff and the location which is popular with the customers.

Am I missing something ? I hope this is legal.
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I'd be concerned that the company as it is is insolvent. What will happen to its existing creditors if it sells its money making ability (lease and equipment)? Do the current directors believe that they can just sell and not pay off the creditors?

With regard to the employess that would be deemed to be a transfer of undertaking so they would have to be re-employed under the same terms and would carry forward length of service and the associated rights (unfair dismissals etc)
 
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The whole situation is much too complicated and strewn with pitfalls to discuss to any meaningful extent on a forum such as this.
 
ubiquitous said:
The whole situation is much too complicated and strewn with pitfalls to discuss to any meaningful extent on a forum such as this.
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I know it is complicated, but pitfalls ?!!! Isn't that the reason why somebody posts here - To find out what they are. Why wouldn't one discuss complicated issues in this forum ? Is this only meant for ' How do I setup a new company' kind of questions.

The reason I posted here is to find out if there was anything legally incorrect with the plan. From what I understand there are more issues from a seller's side than from a buyer's side. But since a deal involves both parties it may not be the best thing to do. I take the point.

Anyway, I am not proceeding with this deal as my discussions with the potential partner did not work out satisfactorily.

Thanks everybody for providing valuable feedback.
 
anan said:
I know it is complicated, but pitfalls ?!!! Isn't that the reason why somebody posts here - To find out what they are. Why wouldn't one discuss complicated issues in this forum ? Is this only meant for ' How do I setup a new company' kind of questions.
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Unfortunately not all issues in business or in life are simple and straightforward, and unfortunately the regulatory framework in this country is complex - especially in areas such as insolvency and employment law, both of which affect (or affected) the situation you outlined. I would have thought it pretty obvious that a discussion such as this one is likely not to cover all these issues comprehensively. You admitted this in your first post when you said:

I know I have to speak to my solicitor, accountant etc., but just looking for some preliminary advice.
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Btw, if you read the posting guidelines you will see clearly that AAM is not intended as a substitute for professional advice.
 
Hi anan

If it arises again, the best way to use Askaboutmoney is to raise questions and get some points to discuss with your professional advisors. Had you progressed this matter further, you would have been in a better position to discuss issues with your advisors.

Don't write off this project yet. It sounds as if the company is going into liquidation. If it's a business which can be viable, you might the assets from the liquidator. This might be some time away, so you have time to do further research and maybe identify another partner who is employed in the industry and wants to work for themself.

Brendan
 
anan said:
I will ask the staff to resign from that company and join the new company. The cutover should be seamless. It would look like it is the same business as far as customers are concerned without any break. But legally this is a new company which will have no debts.
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Tread carefully. The HR issue is a legal minefield. What if the staff don't agree to your request to resign? Are you intending on misleading customers and suppliers as to the legal entity with which they are trading? How do you plan to get customer lists or supplier lists from the old company? How do you plan to manage the transition with customers, i.e. getting them to pay older invoices to the old company while placing new orders with the new company?
 
It's difficult for anyone to give proper advice in the absense of full details, but if the company is in such bad shape as you say, why not just wait till it does fail (as it surely will), and buy whatever assets you need from the liquidator?

Alternatively, if you do still want to buy at this stage, you have to go in with your eyes open: know exactly what's owed and where (and talk to creditors to see what their position is).

Trying to set up a new company, taking over assets from the previous one (plant/lease/customer base/whatever) whilst trying to leave the liabilities will almost certainly fail somewhere along the line. The Revenue for one take a very dim view of such "Phoenix" companies, even if there is a change in ownership.

To answer your question (1) do people buy loss making companies, the answer is "yes", but usually for a very low price (perhaps zero) as they're taking on liabililities as well as assets. The reason they do it is because they think they can realise more value out of the assets than the existing owners. Ask yourself honestly if this is the case with you.

Buying into or starting a company with someone you don't know also sounds a bit unusual (and ill advised).

In summary:

- get as fully informed as you can about the company, including talking to suppliers and customers

- get to know this other new partner: their plans for the business may be very different from your own.

- get good professional advice before doing any transaction
 
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