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Buying a business can be a fantastic way to take a new step in your career. When you buy an existing business rather than a new company, you skip the beginning phase, where the future and stability of the business is more precarious. Instead, you are likely buying a business that has already had initial success and will not require too much work to get it off the ground. Thus, you will already have customers, a brand, staff, suppliers and long-term contracts. 

Your company can buy a business in many ways. Most people make an offer to purchase the whole business using cash. However, it is also possible for your company to buy another company using stock (a stock sale). This article explains how the process works.

Factors to Consider Before Buying an Existing Business

If you want to buy a new company through a stock sale, you need to be prepared. First, make sure that you thoroughly research the business before making any purchases. Chat to the person who owns the business, and talk to their business representatives and advisors.

Additionally, it is good to ask the owner why they are selling their business. That way, you can get an idea of how the business is going and whether there are any things you need to be mindful of. You will also understand any outstanding stock that the company has and if there are any stock transactions currently occurring. Once you are sure that you want to purchase the business, you should understand its assets, liability, and potential. This will likely impact the possible price that you purchase the business for. 

Valuing the Business

When you purchase a business through a stock sale, two central elements will contribute to the value of the business. First, you will need to look at the business’s health and determine the value of its customers, reputation, brand and existing assets. Next, you will need to check out the business’s tangible assets and calculate the total value. 

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Purchasing Another Company Using Shares

There are a few different ways that your company can buy an existing company. Most transactions involve a simple purchase using money. However, it is possible to buy a company using stock.

A stock sale usually involves purchasing the majority of the stock a company has. Usually, this is over 51% of a company’s stock or shares. Then, your company will become a majority shareholder. In addition, if you become a director of your company, which becomes the primary shareholder of another company, you will effectively become a shareholder. 

It is uncommon for businesses to have 51% of their stock available on the stock market, as this would leave them open to takeovers unexpectedly. Therefore, if you wish to perform a stock sale, you may need to make them an offer or tender for that many shares. You should base this on the stock market price. Otherwise, you run the risk of performing a hostile acquisition, which could cause further issues for the business, as it may startle staff or other shareholders. Usually, when you purchase a majority market share in a company, you will announce that your company will become an acquiring company. If you are planning on merging companies, it is a good idea to provide notice of that as well.

Your New Role

As a shareholder, you will have several rights over the company. You will not be responsible for the day-to-day management of the company. You will gain money from the company based on how many shares you own and the increase in share price. If the business suffers and the share price drops, then you may lose money.

Typically, shareholders do not have much to do with the business’s day-to-day running. Instead, you own a slice of the company due to the stock sale. As a result, you will have proportional votes to the amount of stock you own at a shareholders meeting. This will give you a vote to appoint or remove directors, change the company’s constitution, or put the company into liquidation. You will also have occasional input into the company’s decisions and directions, make decisions on staff and vote on other issues. However, if you want to take on a day-to-day managerial role, you may want to sign up as a company director or take on a managerial position. 

When you buy a company, you will need to inform the Companies Office about any changes you have made to the directors or other managers of the company. 

Key Takeaways

If you would like your company to buy another company using stock, you will need to buy over 51% of the company’s shares. To do this, you will probably want to make an offer or a tender for the shares, as it is unlikely that this many shares will be available to purchase at one time. When you purchase these shares, you will become the majority shareholder. You will have some rights and responsibilities over the company as a shareholder and primarily will benefit from it financially. If you wish to take on a more hands-on approach to the company, taking on a directorship or managerial position will be best. 

If you need help with purchasing another company, our experienced business sale and purchase lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

If my company buys another company using stock, do I automatically become a director? 

No, you become the majority shareholder. You have certain rights and responsibilities relating to the company, but you will not have a hand in the day-to-day operation of the company. If you wish to have a more hands-on role, you may wish to take on a directorship role. 

Do I have to report these changes to anyone? 

Yes, you should inform the Companies Office of any changes to the company management scheme. You must be aware of all your obligations under the Companies Act. 

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