How to get the most out of your business acquisition

It’s a common question – “Will I make money from this acquisition?”

I find myself answering it on a semi-regular basis but the real question you should be asking is: “How do I make the most out of this acquisition?”

The reality is, you can make money from every acquisition – though that’s not guaranteed – and your actions, planning and strategy are the key components of this.

You can acquire a money-making enterprise, only to find it crumble due to a lack of proper preparation.

Equally, you might take on an asset that’s not doing so well but, with the right strategy, it can exceed expectations.

It’s a difficult topic to explain in a single article, so please feel free to get in touch for more tailored guidance, but here’s my thoughts on the topic.

Asset vs share purchases

When it comes to business acquisitions, one of the most critical decisions you’ll face is whether to purchase the assets of a company or its shares.

Each one has different tax implications – that goes without saying – and either can approach can impact the overall value of the deal.

An asset purchase involves buying individual assets of the business, such as equipment, inventory, and intellectual property and gives you the advantage of being able to “cherry-pick” which parts of the business you take.

Importantly, you can also choose which unwanted liabilities to leave behind.

For tax purposes, an asset purchase allows you to allocate the purchase price to different asset categories, which can be depreciated or amortised over time, giving you access to valuable tax deductions.

However, asset purchases can also trigger Capital Gains Tax (CGT) for the seller, which might increase the purchase price.

As such, you’ll want to negotiate a deal that considers these tax costs to avoid paying a premium.

On the other hand, a share purchase involves acquiring the company as a whole, including its assets and liabilities.

This is (usually) simpler and quicker because you won’t need to go through the business’s numerous assets one by one.

From a tax perspective, the best bit is that you’ll inherit the company’s tax attributes, such as carried-forward losses and capital allowances, which can be used to offset future taxable profits.

However, buying shares means assuming all the associated liabilities, known and unknown…

You’ll need to conduct thorough due diligence to uncover any potential tax risks or outstanding liabilities that could diminish the value of your acquisition.

The choice between asset and share purchase depends on your specific circumstances and strategic goals, so consider both options carefully with the help of your accountant or tax adviser.

Reducing your tax liabilities as much as possible

Once you’ve decided on the type of acquisition to pursue, you’ll want to do some serious tax planning before going forward.

One of the key reliefs I always suggest clients consider is Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief.

BADR can reduce the CGT rate on qualifying business disposals to 10 per cent.

I’d strongly recommend that if you are acquiring a business from an owner-manager, ensure they qualify for BADR.

This can mean smoother negotiations and potentially lower the acquisition cost because they won’t be raising prices to offset a higher tax liability.

For your own business, on the other hand, you might want to consider capital allowances

Optimising the acquisition structure

The structure of your acquisition is one of the most important aspects in maximising its value.

If you are acquiring a business to integrate into an existing group, you can benefit from group relief.

This allows losses from one group company to be offset against profits of another, reducing the overall tax liability.

As such, it might benefit you to structure the acquisition to ensure the new company qualifies as part of your group for tax purposes.

An earn-out arrangement, where part of the purchase price is based on the future performance of the business, can spread the tax burden over several years too, potentially lowering your overall CGT liability.

It also aligns the interests of the seller with the ongoing success of the business.

Using debt to finance your acquisition can provide certain tax advantages, as interest payments on loans are typically tax-deductible.

This reduces the effective cost of borrowing and can enhance the return on your investment.

However, you’ll need to ensure the debt level is manageable and does not jeopardise the financial stability of your acquired business.

You might also want to create a holding company to acquire the target business which can provide flexibility and additional tax benefits.

With all of this, however, we highly recommend you speak to an accountant and tax adviser who can guide you through the process.

We’ll be able to give you advice on how to reduce your tax liabilities, whether you should acquire shares or assets, and structuring your business to get the most out of the acquisition.

For help or more information, please get in touch with our team.