DCA Q&A: SHOULD I GO FOR THIS ACQUISITION?
Q: An opportunity has come up to buy a competitor at a very good price. The company has been doing well, as far as we can tell: the owner just says that he wants to retire. In fact, he’s expressed a preference for us buying his company outright so he doesn’t have to go through the rigmarole of winding it down – hence the very good price offered.
I know that I’ll have to do my due diligence, but I’m seriously tempted by this prospect. The buyer seems a straight kind of dealer, and combining the companies would be hugely beneficial. Will it be possible to merge the two companies? They’re both limited by guarantee, just in case that’s relevant.
A: I would be extremely cautious about buying the company outright – in fact, it might not even be possible. While purchasing a company is a lot easier where it’s limited by shares (you just buy the shares for a named fee), buying a company limited by guarantee will only be possible if there’s some clause in his company’s memorandum and articles of association covering this.
More importantly, the usual practice – even with companies limited by shares – is for the buyer firm to purchase the assets from the seller, which then applies for voluntary strike off (VSO). Maybe the seller doesn’t want to go down the VSO route because he doesn’t want undue hassle. However, he might be trying to avoid a creditor or a problem with the books from coming to light.
For that reason, I’d be inclined to insist on buying the assets – and not the liabilities – of your competitor’s company, even if this means paying more. You’ll feel a lot better having paid a few thousand extra to this guy if striking off his company proves anything other than routine. Even if it doesn’t, I’d argue that the peace of mind should be worth it.
Even though you say this buyer is a pretty straight kind of dealer, I do think you should insist on a non-disclosure agreement and a non-compete agreement as part of the sale. The last thing you want to do is buy his company, only to watch him emerge with a new one and poach your acquired clients. If he balks at this – or indeed at transferring the assets to you – I’d be wary of him as a purchaser.
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