Forms of Acquisition - Assets or Shares
Acquisitions usually take one of two forms. The first is to purchase the entire share capital of a company. This method is known as a ‘share purchase’. The second method is to cherry-pick the assets which make up the business being acquired. This method is known as a ‘business’ or ‘asset’ purchase.
It is important to understand the difference between the two. If the shares are purchased, then all the assets, obligations and liabilities of the business will be automatically acquired (even those of which the purchaser was not aware). In a business purchase, only those assets and liabilities which the purchaser chooses will be acquired, and, with some exceptions (notably employees who may transfer automatically under TUPE regulations), any others do not automatically transfer to the new owner.
The valuation of shares can be carried out by valuing net assets or by reference to profits earned by the company or a combination of both. Where the yardstick is profits earned based both on historical and future earnings, you will want to be sure the profits will continue to be earned at the same or an increased level. You may also want to defer payment of part of the price or to make payment conditional on a specified profit level being achieved. The valuation of business assets is a question of finding the right figure in the light of the assets' cost price and current economic or realisable value. You may need to involve a suitably qualified expert either to fix the figure or to act as mediator if there is a dispute.
You should ensure in either case, that your price formula allows for any liabilities of the previous business you have taken over, e.g. employees.