DEAL OF THE MONTH AUGUST 2016
DEAL OF THE MONTH
At the end of May, we were approached by a client, who was interested in buying a restaurant business. The legal owner of the restaurant (the seller) was a limited liability company, registered in the UK. The owner of the company was a person. The question we had to consider and advise our client on was whether he should buy the shares or the business.
Generally, it is a lot safer to purchase assets, rather than shares. We explained to our client, that if he decides to purchase the shares, he will be inheriting all assets and liabilities of the company. There would have to be extensive due diligence, legal as well as financial. The relevant documents would be a share purchase agreement, and depending on the due diligence findings, there might be the need for various assignments, assignment of good will, for example. On the other hand, if he decides to purchase the assets, we can consider which assets exactly he does need and wish to purchase. Another important consideration was that our client, if assets are purchased, will not be responsible for the debts of the company. Having said that, it was important to understand, that a lot more documentation can be involved in purchasing assets, because our client will become a completely new owner of the business, and every part of that business would need to be transferred to him, including property, employees and contracts. There is also a very important point on who will be providing warranties and indemnities relating to the affairs of the business. In the asset purchase, this will be a company. Having sold the business, the company may have not many other assets and/or funds in its account. Should there be a breach of any warranty or indemnity, our client may not be able to recover his losses, unless retention of funds agreed. Warranties and indemnities in any agreement are only as good as the person giving them. On the other hand, in a share purchase, it would be the seller of the shares giving guarantees about the business, and he (a physical person), who has only recently sold the business, is likely to be able to pay compensation. Personal guarantees of physical persons are always better than those of companies.
In the end, having considered all matters carefully, including the limited history of the company and well organised administration, our client made a decision to purchase 100% shares in the company – the owner of the restaurant. Red Square London conducted appropriate due diligence, negotiated all transaction documents and completed the purchase in the middle of July.