In buying or selling a company, you can choose to transfer either the assets or the shares. There is a distinct difference and whether you are buying or selling, it is important to understand the liabilities involved with the transaction.

Which is best, an asset sale or a share sale?

Deciding whether it is best to buy or sell the assets or shares will depend on the unique circumstances of the company, the owner and the buyer. There are many considerations to take into account, including the likely ongoing liabilities and the price.

The decision of whether to sell shares or assets only arises when the business in question is a limited company. Where the enterprise is operated by a sole trader or partnership, there will not be any shares to sell.

Asset sale

Buyers usually prefer to purchase just the assets of a business. This is because they can effectively leave behind any unwanted liabilities that the company may have incurred, such as onerous commercial leases, environmental issues or legal action. They can, if they choose, take on specified liabilities, such as a commercial lease, business contracts and rental agreements for plant and machinery.

The buyer can negotiate exactly which assets they want and do not have to take on employees where Isle of Man law applies as the Island has not adopted the UK’s Transfer of Undertakings (Protection of Employment) Regulations 2006.

Share sale

Sellers would usually rather sell shares in the company. This is because all of the assets, obligations, liabilities and rights that the company has will be transferred to the buyer, freeing the seller of potentially unwanted issues going forward.

Because of the onerous nature of this type of purchase, it is essential that the buyer carries out in-depth due diligence investigations to ascertain the extent of the liabilities they are taking on. This should include financial and legal investigations carried out by professionals.

A share purchase can be less disruptive to the running of a business as the company’s contracts and licences will continue to run.

Business sale agreement

The terms and conditions included in any sale agreement are vitally important to protect the buyer and seller from liabilities. It is important that both parties understand the extent of what is changing hands.

In a sale, particularly in the sale of shares, the agreement will often contain extensive warranties and indemnities to safeguard the buyer’s position.

Warranties given by the seller include that accounts and other financial information are correct, shares are owned by those noted as owners, verification of the company structure, good title to assets is held, to include intellectual property and that information in respect of contracts, licences, employment and any legal disputes is correct.

The seller will also be required to give indemnities on the sale of shares. This is the agreement to compensate the buyer in respect of certain specified issues, such as a claim for environmental contamination, legal proceedings against the company or customer disputes. Indemnities are usually limited, for example, in respect of amount, time or number of claims.

The extent of any warranties or indemnities is often an issue for negotiation during the sale process.
For more information about purchasing a business and the due diligence process, see our recent article How to buy a business.

Contact us

At Quinn Legal we have extensive company and commercial knowledge. If you are considering buying or selling a business on the Isle of Man we can advise you as to whether an asset or a share transaction would be in your best interests. We will also represent you during negotiations in respect of the purchase agreement and ensure that you are fully aware of the extent of any liabilities that you are taking on.

For a no obligation initial consultation or to make an initial free enquiry, please call our team on 01624 665522, email us at email us: hello@quinnlegal.im or fill in our online enquiry form.

If you are considering selling your business, you will want to maximise the amount you receive. By attending to certain issues before you put your enterprise on the market, you stand a good chance of being able to obtain a better price.

Not only this, but you may find it easier to sell and with a faster transaction time than might otherwise be the case.

1. Settle internal disagreements

If there is an internal dispute, this could escalate under the pressure of a sale and it will make your enterprise far less attractive to buyers.
For example, if shareholders are in disagreement with the directors, this is likely to come up at the time of any sale and you may be asked to address this. By dealing with it before you put your business on the market, you can be sure that this won’t be a cause of delay.
Speak to those involved and look for a way forward. If the dispute has been ongoing for some time and positions are entrenched, mediation may help.

2. Legal issues

As well as internal disputes, you may be involved in legal disputes with external parties. This has the potential to be really off-putting to buyers and they will want you to give indemnities in respect of any legal action.

The best option is to try and settle the matter before you sell. Try and formulate a plan for solving the dispute and remember to look at the bigger picture. You may have to compromise, but if the result is putting a difficult disagreement behind you, it is worth at least considering.

Professional guidance will help you decide how you want to proceed and what concessions it might be reasonable to make.

3. Review your documentation

As well as examining your financial records, your buyer will want to see all of the legal documentation that your business is a party to, including the following:

•  Supplier contracts
• Employment contracts
• Shareholder or partnership agreements
• Commercial leases
• Title to real estate
• Title to intellectual property

If you have a suspicion that some of it might not be quite as robust as it should, take the time to have it redrafted. An expert commercial advocate will be able to help you look at any documents that need updating or creating to safeguard your business’s interests. Getting this done before your buyer makes enquiries will not only prevent delays while amendments are made or discussed, but will also give a better impression of your enterprise as efficient and well run with good attention to detail.

Protect your intellectual property

Intellectual property (IP) may be created in the course of running a business and it is easy to overlook protection for this asset. Take an inventory of your IP before you sell and where necessary apply to register trademarks, such as your logo or any product name that your business relies on, and any registered designs.

Collect in debts

Make a concerted effort to collect in as much debt as possible. A large number of unpaid invoices does not send a positive image to potential buyers. They may expect a nominal amount to be outstanding, but if you are owed a substantial sum you should attempt to deal with this.

For information, see our recent article, How to get the best price for your business.

Contact us

At Quinn Legal we have extensive company and commercial knowledge. If you are considering selling your business and you need advice on preparation to put your enterprise in the strongest possible position, we can help you address any issues.

For a no obligation initial consultation or to make an initial free enquiry, please call our team on 01624 665522, email us at email us: hello@quinnlegal.im or fill in our online enquiry form.

If you go into business with someone else, you will usually have established a partnership, whether or not you have put this in writing. By signing a formal partnership agreement, you can set the ground rules for your relationship and avoid misunderstandings and disagreements in the future.

Is a partnership agreement essential?

While it is not essential to have a written partnership agreement, if you do not, then the terms of the Partnership Act 1909 (the Act) will apply by default. Some of the provisions of the Act will not necessarily be what you might have chosen and can have onerous consequences.

For example, where the Act applies, all partners will be jointly liable for the partnership debts or wrongful acts of any of the other partners, all partners will have an equal say in making business decisions, no partner can be expelled from the partnership and any partner can end the partnership at any time.

This risks paralysing the partnership if agreement cannot be reached and also means that there is an ever-present risk that one partner could simply choose to end the partnership.

By having a bespoke partnership agreement drawn up, you can tailor the provisions to suit your specific circumstances and try to put provisions in place to avoid disputes.

Key clauses for partnership agreements

The partnership agreement should accurately reflect your wishes for the business. Going through the process with your partners of deciding what you want included and how you want matters arranged will help you ensure that you have properly considered and agreed all aspects of your partnership.

Some of the main clauses that are usually written into a partnership agreement include the following:

• Who owns which assets;
• Who has authority and who is responsible for each type of decision;
• Allocation of profits, losses and liabilities;
• Who will be liable for a decision which leads to a loss?
• How can a partner leave or be asked to leave?
• How can a new partner be added?
• Who needs to authorise or agree the borrowing of money?
• What salaries or other reimbursement can be taken by partners?
• Who can call a meeting and how many partners need to be present to make a decision?
• Non-compete clauses;
• An agreed procedure for dispute resolution.

While there are many details to work through before a partnership agreement can be drafted and signed, by putting a robust framework in place at the outset, a partnership stands the best chance of success.

The types of partnership

As well as deciding on the provisions of any agreement, you will also need to decide on the type of partnership which is best suited to your needs.

A general or conventional partnership allows partners to co-own a business and they will be personally responsible for the liabilities and debts of the partnership.

A limited partnership has one or more general partners and one or more limited partners. The liability of the limited partners does not exceed the amount they have invested, while the general partners will be fully liable for all of the partnership liabilities and debts. These can also elect to have a separate legal personality from its members, simplifying ownership of property in the event of a change of partner.

A limited liability company, often referred to as an LLC, can limit the partners’ financial responsibility. (These are known as Limited Liability Partnerships in the UK.)

It is advisable to take legal advice about which type of partnership would best suit your requirements as well as in respect of the contents, to ensure that you have the right framework in place for your business.

Contact Us

At Quinn Legal we have extensive company and commercial knowledge. If you are considering entering into a partnership on the Isle of Man, we can advise you on the process and ensure that all of the necessary documentation is in place setting out the details in full.

For a no obligation initial consultation or to make an initial free enquiry, please call our team on 01624 665522, email us at email us: hello@quinnlegal.im or fill in our online enquiry form.

When two or more businesses want to work together on a project, a joint venture agreement sets out the details of their temporary partnership. This allows them to collaborate with the security of knowing what is expected of them and the other parties involved so that misunderstandings and disagreements can be avoided.

The benefits of a joint venture

Working with another business for a period of time can have many advantages. It allows you to expand and develop new markets or products and to access your partner’s markets and distribution networks.

It is an easy and flexible way to increase your capacity and also to gain access to expertise and resources. Because of its temporary nature, a joint venture is less onerous than a partnership agreement and allows you to retain your independence.

If correctly set up, a joint venture can also avoid any potential conflict from different tax rules for each partner which might otherwise prove expensive and time consuming to sort out afterwards.

The importance of a joint venture agreement

If you want to work together with another organisation, it is essential to put the details of your agreement in writing in a joint venture agreement. This will allow you both to protect your position and give you the security of knowing exactly what your rights, responsibilities and obligations are.

The key issues will need to be identified and clearly set out together with details of what will happen in all eventualities.

If the joint venture is complex, it may be necessary to set up a separate business, but usually a contractual joint venture is appropriate for simpler undertakings.

The details included in a joint venture agreement

It is essential to have the agreement tailored to your specific venture so that you can be sure that all of the details are properly addressed. The following clauses will usually be included:

• The objectives of the venture;
• Who will manage the venture and what level of control each partner will have;
• Who will take on which responsibilities;
• How much time each party is expected to devote to the venture;
• Whether each party will transfer assets or employees to the project;
• How the venture will be structured, ie. whether it will be a separate business in its own right or a contractual joint venture;
• What financial and other contributions will be made by each partner and when they will be made;
• Details of how profits, losses and liabilities will be apportioned;
• Ownership of any intellectual property;
• A process for resolving any disputes;
• How the venture will be ended and how the parties can sale or transfer their share should they wish to.

As an alternative to a traditional JV agreement, the Isle of Man Limited Liability Company (similar to an LLP) is specifically designed for use by International JV partners, setting out clearly the relationships and responsibilities between partners and simplifies the management of a complex JV.

Setting up a joint venture

If you are considering entering into a joint venture, you should ensure that all eventualities are thought out beforehand. This will help establish trust with the other parties involved and set the ground rules before the venture begins.

We can advise you on the process of entering into a joint venture as well as working with you to ensure that this is the correct structure for your project, for example, whether a partnership, limited liability partnership or company would be more appropriate.

Contact Us

At Quinn Legal we have extensive company and commercial knowledge. If you are considering entering into a joint venture where one or more parties is based on the Isle of Man, we can advise you on the process and ensure that all of the necessary documentation is in place setting out the details in full.

For a no obligation initial consultation or to make an initial free enquiry, please call our team on 01624 665522, email us at email us: hello@quinnlegal.im or fill in our online enquiry form.

Valuing a business can be a useful exercise for a number of reasons. As well as being essential during the buying or selling process, having a valuation can help you secure a loan or investment, set a share price, assess the financial health of your business or help in succession planning.

Areas to look at when valuing a business

Businesses have both tangible and intangible assets. Tangible assets such as stock, premises and machinery are relatively straightforward to value.

Intangible assets are harder to assess. These include the reputation of the business, its age, the strength of the customer base, whether a sound team is in place and the business’s intellectual property such as its brand and trademarks.

Other circumstances will also affect value, such as the state of the market, whether the sale is voluntary or not and the age of the business. A start-up may not be profitable but could have high growth potential, while an established business may be on a more predictable trajectory.

Business valuation methods

There are a number of ways of valuing a business and each sector tends to have its favoured methods.

Asset valuation

This method is suited to businesses with substantial tangible assets. Both tangible and intangible assets are valued and the amount of any liabilities such as debts and credit is subtracted to provide a net book value of the business.

Valuing a business in this way does not take into account goodwill, ie. the amount that buyers might be prepared to pay for the company.

Entry cost

Entry cost valuation looks at how much it would cost to set up a similar business from scratch. This would include buying assets, setting up the business’s legal framework, taking on and training staff, marketing and developing the business to the point the existing organisation is.

Comparable analysis

If other similar businesses have been sold recently, then an easy valuation is to carry out a comparison. Make sure that the other businesses really are comparable, or make adjustments for any obvious differences, such as premises in a more expensive area or a bigger market share.

Price to earnings ratio

An established business can be valued by looking at the profits a business is making each year and multiplying them on the basis of their potential in the future. For example, a start-up with the likelihood of good and rapid growth would have a higher multiplier than a stable, steady business with no plans to expand.

The annual profit, adjusted to include any upcoming events such as extra costs or investment, known as the normalised profit, would normally be multiplied by a figure between three and five, depending on the anticipated trajectory of the business. For a business with huge potential, the figure could be substantially higher, as is often seen in the tech start-up sector.

Discounted cash flow

Discounted cash flow valuation is a more difficult way to value a business and is suitable for mature and stable businesses. It values estimated future cash flow and dividends over the next fifteen years or so, with the residual value that is anticipated to be there at the end of that period also added in.

This is a complex method of valuation and generally only used for large organisations.

In summary

Valuing a business can be complicated and the actual achievable price will depend on what potential buyers are prepared to pay, and so may skew the value in either direction.

If you are thinking of selling your business, there are steps you can take to both prepare it for sale and to make it more attractive to buyers. For more information, see our article How to get the best price for your business.

Contact Us

At Quinn Legal we have extensive company and commercial knowledge. If you are considering either buying or selling a business, our expert team can offer advice and guidance as well as negotiate on your behalf and prepare the necessary documentation.

For a no obligation initial consultation or to make an initial free enquiry, please call our team on 01624 665522, email us at email us: hello@quinnlegal.im or fill in our online enquiry form.