Ask the Expert: Buying shares
Grant Howard, partner at Burgis & Bullock Corporate Finance, talks business owners through identifying companies to buy shares in.
All answers are for general guidance only. Each case must be handled on the individual facts
Q: What’s involved in buying shares in a company and how do I identify target companies?
Firstly, define your acquisition strategy and rationale – an in-fill acquisition, consolidation plan, expansion into new markets etc. This will enable you to outline the acquisition criteria including business activities, size, location, and management requirements. Also, ensure financial parameters, that is the financial returns you expect from the deal, are in place so that you can properly evaluate matters such as what to pay.
Be proactive in your search. Simply waiting for companies to approach you or searching the numerous online “company for sale” listings will mean you miss out on the best opportunities or that you end up in an auction against other buyers.
Using a corporate finance adviser can be helpful in the search. Firstly, they should have access to databases, research tools, and professional/industry contacts to identify targets outside of your immediate market sector. Secondly, they can make confidential approaches on your behalf so that your identity is kept hidden until you have assessed whether the owner is interested in talking about a possible sale.
Once you have completed your commercial and financial evaluation of the business you will need to agree a price with the owner. This is typically achieved through a process of negotiation, leading to agreement on a term sheet or “Heads of Agreement” which summarises the key points of the deal. This is then used by the lawyers to prepare the sale and purchase agreement.
Remember that, unlike an asset purchase deal, when you buy the shares of a company you take on all the historic problems which that company may have. It is important, therefore, to undertake a thorough investigation of the business (called due diligence) to ensure there are no hidden liabilities, overvalued assets, or legal issues. If you cannot get comfortable with any potential liabilities, you may need the seller to assume this risk which is done by them providing you with a warranty or indemnity in the sale and purchase agreement.
In some cases the purchase of a company may need the approval of third parties, such as HM Revenue & Customs, The Pensions Regulator, or Competition Commission.
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