Is a recession the best time to buy (or sell) a business?
Walt Disney has been quoted as saying:
“I’ve heard there’s going to be a recession. I’ve decided not to participate”.
I couldn’t find if it was a genuine quote or one of those internet quotes, but I like it nonetheless.
And I see my clients seem to adopt that attitude as well – so it must be correct, right?
Many of my clients see a recession as an opportunity, or more correctly as opportunities, as they rarely rest their laurels. They go again. The find the next opportunity.
For many, that opportunity is buying (or indeed selling) a business.
There are always more sellers in a recession; people that want out, are fed up with it all, are just at the right age to enjoy retirement and so on. Their reasons are numerous, but find them at the right time and for the buyer, there lies the opportunity – the ability to buy a business at a discount, or at least at value as the current owner hasn’t effectively ran the business or seen the upside potential that the buyer now does.
Rarely will someone sell their business vastly below value – usually a business valuation would be based on turnover/profit plus stock and assets – but there are a number of ways to value a business and some are easier to value than others. I’m not an expert on business valuation, but all I’m saying is that there is opportunity there.
Once you’ve identified a target business to buy, you’ll usually reach a “heads of terms” agreement with the seller, setting out the non-binding agreement in principle, what terms are agreed perhaps such as:
- Purchase price
- Payment schedule
- Conditions or restrictions
- Anticipated date
- Assets not transferring (if asset sale)
The heads of terms document should be simple and almost all of the deal will be left to the legal documents which follow.
There are two principal methods of acquiring a business in the UK:
- Asset purchase. This involves the buyer acquiring a bundle of assets and rights of the selling business.
- Share purchase. This involves the buyer acquiring all of the shares in the selling company.
An asset purchase is used when the seller is a sole-trader or partnership (as there are no shares to buy). It can also be used if a company seller is in administration or liquidation, or in other circumstances where the debt or liability of the seller is not being transferred to the buyer.
While the final division of assets between buyer and seller will vary from deal to deal, items that are commonly acquired as part of an asset purchase transaction include:
- Business information and records
- Goodwill
- Information technology and IT systems
- Intellectual property rights
- Plant and machinery
- Premises
- Stock
- The benefit of business contracts
A share purchase meanwhile see the buyer acquire ownership of the shares in the selling company – buying the shares from the shareholder.
In a share purchase, all of the assets and liabilities remained owned by the company – it is just the legal owner of the shares that change hands.
Obviously there are a number of steps to deal with whichever structure is used, and I can only but recommend that you take independent legal advice whether you are a seller or buyer.
If you’re buying, you’ll want to ensure that you get what you think you’re buying, that there’s no hidden surprises in the company’s cupboard and perhaps that the seller doesn’t set up in competition and take all the customers after the sale.
If you’re selling, you’ll want to ensure that you get paid and that you aren’t agreeing to any onerous terms which the buyer could use to wriggle out of payment – especially if the payment terms are deferred.
But either way – opportunities arise – if you’re buying then you potentially get a business to mould and grow how you wish for now and the future. And if you’re selling, well then welcome to retirement I guess – although I see many clients that sell with one eye on retirement and end up getting back into business anyway. Perhaps that’s another opportunity calling.
Originally posted 2020-11-13 17:16:48.
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