Understanding the Risks When Acquiring a Business, Buying the Business or Buying the Shares
When buying an existing business, you have two main options: buying the business itself or buying its shares. Both methods let you control the business, but they have different risks. These risks are especially important for taxes and legal duties. Let’s look at these two options and discuss the possible risks in simple terms.
Choice 1: Purchasing the Business as an Ongoing Entity
When you buy a business that is running, you are buying its assets and liabilities. This means you get the physical items the business owns, like equipment, inventory, and property. You also take on any obligations, such as debts or employee contracts.
This choice allows you to start afresh with the company's operations. The primary advantage is that you only assume what's outlined in the sale contract. Any legal or tax complications from the business's history remain with the seller. You're not liable for issues that occurred prior to your takeover, thereby minimizing your risk.
Alternative 2: Purchasing the Company's Stock
Another method of acquiring a business is through share purchase. This approach allows you to own a portion of the company and its past. At times, this can be a quicker and more cost-effective strategy. Nonetheless, it comes with significant risks that you should be aware of.
The Unseen Dangers of Purchasing Stocks
Purchasing shares implies you assume all aspects of the company, including any concealed issues. This means that if the company has unpaid taxes, legal issues, or other debts, you are responsible for them. Here are the primary risks:
- Tax Liabilities: A major worry when buying shares is hidden tax liabilities. The company might owe back taxes to SARS that were not revealed. There could also be mistakes in past tax filings that may cause penalties later. Once you own the company, these issues become your responsibility.
- Legal Obligations: If there are legal claims or disputes the company had before you bought it, you take on those issues. This could be a lawsuit from a past supplier or an unpaid contract. These legal problems might affect you after the purchase.
- Unknown Debts: A company may seem strong on paper, but it might have hidden debts or obligations. When you buy shares in a company, you accept all these possible unknowns. These issues could cause problems for you later.
Hazards Associated with Purchasing an Inactive Business
Some buyers are interested in the idea of getting a dormant or shelf corporation. This is a company that is legally set up but is not currently active. The appeal lies in bypassing the trouble of setting up a new business and diving directly into commerce. Nonetheless, this approach also carries its own set of risks.
- Unknown History: The Risks of Purchasing a Dormant Company**
When thinking about buying a dormant company, it is important to know that its history may be unclear. A dormant company is one that has stopped its business operations and is not active in the market. However, this does not mean the company has no problems or debts.
Before it became inactive, the company may have been involved in many business activities. This could have created a complicated legacy.
For example, it might have had contracts with suppliers, customers, or partners that were not fully resolved. These agreements could lead to legal disputes or financial obligations. The new owner would inherit these issues upon acquisition.
Moreover, unresolved issues may extend to tax obligations. The dormant company might have outstanding tax liabilities that it did not address before it ceased operations. This could include unpaid corporate taxes, payroll taxes, or other financial responsibilities to government entities. If the new owner does not identify and fix these issues before the purchase, they could face large fines or legal trouble from tax authorities.
In addition to tax issues, hidden debts pose another risk. The company may have accrued debts that it did not disclose or document properly. These could include loans, credit lines, or other financial commitments that the company left unresolved when it became dormant.
If these debts are discovered after the acquisition, the new owner might have to pay them back. This could cause unexpected financial strain.
Tax Obligations: Even a dormant company may still have tax obligations from the past. If the previous owner didn’t file returns or pay taxes, SARS could pursue the company. Since you now own it, they will come after you.
Regulatory Compliance: Dormant companies might not have followed regulations before. This could result in penalties or fines you must pay as the new owner.
Understand the Hazards Prior to Purchase
Buying an existing business can help you grow. However, it’s important to know the risks, especially when buying shares.
Always do careful research and check the company’s financial and legal history. Talk to a professional before making any decisions. This will help you avoid hidden problems that could make your business purchase a costly mistake.
By knowing these risks, you can make better choices when talking to clients about buying a business. This helps ensure a smoother transition and a safer future.
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