3. Instead of setting up a new business, can I acquire an on-going business? What do I have to bear in mind if I intend to do that?
Starting a small business can be a challenging and exciting experience. However, rather than building a business from ground zero, you may consider purchasing an existing and on-going one.
The advantages of acquiring an existing and on-going business are obvious. Just to name a few: the product or service is already on the market, the brand is probably well established, startup time can be significantly reduced, it is probably much easier to obtain financing, access to customer base is secured, etc. The purchaser just has to evaluate how much it is willing to pay for the business and find a seller who is willing to sell at a mutually agreed price.
The most straight forward way to acquire an on-going business is to acquire all the shares in the company which runs that business. The company’s entire rights, obligations and liabilities will be assumed by the purchaser. The purchaser of course has to conduct due diligence investigation on the subject company to make sure that it is buying what it really wants. The parties should then work on an agreement for sale and purchase of shares to stipulate items like price, completion date, warranties and representations by the seller, indemnity for tax liabilities, limitation of seller’s liability, etc. Depending on the size and complexity of operation of the subject company, the entire sale and purchase process can be very complicated and could take months to complete. Since this is not an easy task to go through the entire sale and purchase procedure without professional assistance, the purchaser and seller will be taking considerable risks if they do not engage professionals like accountant and lawyer in the process.
In cases where the purchaser only wants to acquire certain business(es) from a company instead of the entire company, the purchaser will be able to pick and choose which assets and liabilities it wishes to purchase. For example, a company may operate a chain of restaurants with different trade names; and a purchaser may be interested to acquire only one of the restaurants. In such circumstances, the parties will be dealing only with the sale and purchase of the business of that particular restaurant. This represents a transfer of business without any transfer of shares in the holding company. Apart from any agreements that the seller and the purchaser may make between themselves, the transaction will also be subject to the Transfer of Business (Protection of Creditors) Ordinance (Cap.49). This Ordinance provides that in a transfer of business, the purchaser will become liable for all the debts and obligations in relation to the carrying of the business unless the parties follow certain procedures set down by the Ordinance. The most significant procedure is that the parties have to publish a Notice of Transfer of Business in the Government Gazette not more than 4 months and not less than one month before the date the transfer takes effect. The Notice shall become complete upon the expiration of one month after its publication. The purchaser will cease to be liable for all obligations in relation to the business unless a creditor institutes proceedings against the seller in respect of any liability arising out of the business before the Notice becomes complete.
If the business is run by a sole proprietor or a partnership, the concept of share-acquisition will be irrelevant. In case of sale and purchase of such a business, the scenario is similar to that discussed in the last paragraph for acquisition of business. The parties should also strictly follow the procedures set down by the Transfer of Business (Protection of Creditors) Ordinance (Cap.49).