Understanding the Risks When Acquiring a Business, Buying the Business or Buying the Shares
When acquiring an existing business, there are two main options: buying the business as a going concern or purchasing the shares of the company. While both methods can give you control of the business, they come with different risks, particularly when it comes to tax liabilities and legal obligations. Let's break down these two approaches and explore the potential risks in simple terms.
Option 1: Buying the Business as a Going Concern
When you buy a business as a going concern, you are purchasing the assets and liabilities of the company. This means you are buying the physical things the business owns, like equipment, stock, and property, and taking over any obligations, such as debts or employee contracts.
This option allows you to start fresh with the business's operations. The main benefit is that you only take on what is specifically outlined in the sale agreement. However, any potential legal or tax issues related to the company's past are left with the seller. You’re not responsible for problems that occurred before you took over, which lowers your risk.
Option 2: Buying the Shares of the Company
The second way to acquire a business is by purchasing the company’s shares. When you buy shares, you are taking ownership of the entire company, including its history. While this method can sometimes be quicker and cheaper, it comes with significant risks that you must be aware of.
The Hidden Risks of Buying Shares
When you buy shares, you inherit everything about the company – including any potential skeletons in the closet. This means that if the business has any unpaid taxes, legal disputes, or other liabilities from the past, you become responsible for them. Here are the key risks:
Tax Liabilities: The biggest concern when buying shares is the risk of hidden tax liabilities. The company may owe back taxes to SARS that weren’t disclosed, or there may be errors in previous tax filings that could lead to penalties in the future. Once you own the company, these become your problem.
Legal Obligations: Similarly, if there are unresolved legal claims or disputes that the company was involved in before you bought it, you inherit those issues. Whether it’s a lawsuit from a previous supplier or an unpaid contract, these legal problems could catch up with you after the purchase.
Unknown Debts: Even if a company looks good on paper, there may be debts or obligations that were not fully disclosed. Buying the shares of a company means you take on all of these potential unknowns, which could come back to haunt you later.
The Risks of Buying a Dormant Company
Some buyers are attracted to the idea of buying a dormant or shelf company – a company that has been registered but isn’t actively trading. The idea is that you can skip the hassle of registering a new company and jump straight into business. However, there are risks here as well.
Unknown History: When you buy a dormant company, you may not know its full history. The company could have been involved in business before becoming dormant, and there may be unresolved issues, such as tax obligations or hidden debts.
Tax Obligations: Even a dormant company may have tax obligations that weren’t met in the past. If the previous owner didn’t file returns or settle tax liabilities, SARS could come after the company – and since you now own it, they’ll come after you.
Regulatory Compliance: Dormant companies may not have been compliant with regulations in the past, which could lead to penalties or fines that you have to pay once you become the new owner.
Know the Risks Before You Buy
While acquiring an existing business can be a great way to expand your operations, it’s essential to understand the risks involved, especially when buying shares. Always conduct thorough due diligence, review the company’s financial and legal history, and consult with a professional before making any decisions. This way, you can protect yourself from potential hidden problems that could turn your business acquisition into a costly mistake.
By being aware of these risks, CIBA members can make informed decisions when consulting with their clients about acquiring a business, ensuring a smoother transition and a more secure future.
Have a look at the CIBA Academy CPD Calendar Here and book your next CPD.
