Buying a business owing debt

Buying a business owing debt

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I have been looking to purchase a local bike shop. I heard the owner was looking to sell so I approached him for a meeting to discuss the proposition. The businessman selling owns several businesses both of these companies have been registered under the same limited company since 2009. The current owner explained that his business partner who was responsible for paying the tax on the business has not and the accumulated debt on the limited company is in the region of £40k. The bike shop t/o is £300k with a net profit of £54k. The assets in the business (stock) is valued at £70k.

The owner has advised me that with his accountant he has set up a new limited company name for the bike shop and would like to sell the whole business for the new owner to then transfer the old company assets to the new company and leave the debt liable in the old company. I'm wondering how this works? Would I be liable for bad debt by doing this - the debts are HMRC tax and PAYE owed. The business is still making a profit and has had growth of 20% each year in the 3 years it has been operating. Any and all advice would be greatly appreciated.

Replies (19)

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Glenn Martin
By Glenn Martin
18th Mar 2013 21:32

What are you buying.
Are you buying the stock and acquiring the lease on the property, if so do it and trade it however you wish via your own company or sole trade. His set up sounds fishy and I wouldn't buy the company with inherent debt problems which ultimately will becomes yours. I certainly wouldn't transfer any VAT numbers or take his company on.

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By petersaxton
19th Mar 2013 00:24

What do you mean?

" he has set up a new limited company name for the bike shop and would like to sell the whole business for the new owner to then transfer the old company assets to the new company and leave the debt liable in the old company"

The above doesn't make sense.

What is "the whole business"?

You can't just steal the assets from a company.

Speak to your accountant.

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By JamesPrice
19th Mar 2013 07:15

Gearing
I'm not going to say anything about bike businesses and gearing.

In theory a new company owned by you could buy the trade and assets relating to the bike business from the current owner, but I would proceed with caution. If the seller goes bust soon after doing a deal with you, then, ultimately, you might find yourself having to deal with a liquidator whose agenda might be to unravel the transaction or get more money from you on the basis that creditors (eg HMRC) were disadvantaged.

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By johngroganjga
19th Mar 2013 09:40

Don't buy shares

As long as you don't buy shares, just assets, and as long as you pay fair market value, as you will if you are dealing with the vendor at arm's length and there is no hidden agenda, you will have no problems.

Debts will stay with the old company, which is why you should not buy it.

Nothing to stop you using a new company to make the purchase, if that is how you want to trade going forward.

A liquidator can only "unravel" transactions at undervalue, or transactions that favour one creditor at the expense of another.  Your transaction will not be at undervalue and you are not a creditor.

Obviously you will have to decide what price it is worth paying and whether you can make a go if it.

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By frustratedwithhmrc
19th Mar 2013 14:16

Wouldn't touch this with a barge pole.

There are very good circumstances for buying a business as a going concern, lock-stock-and-barrel. There are also good circumstances for buying assets from a failing business during a formal liquidation.

This is neither of those and I would be concerned about exchanging good money for essentially 'tainted assets'.

The worst possible circumstance would be to have the transactions unwound and effectively HMRC seize the properties in repayment of taxes without any requisite repayment of the funds used to purchase the assets in the first place.

This whole set-up just sounds like an attempt to cheat the public purse on the part of the seller and his alleged accountant (who probably isn't anything of the sort).

Worse still the buyer and yourself might be deemed complicit as well. 

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Replying to SteveOH:
By johngroganjga
19th Mar 2013 14:36

With respect don't see how HMRC can seize a company's properties in payment of taxes.  What they can do is petition for the company to be wound up.  A liquidator is then appointed, whose powers to reverse past transactions are what I set out above - or am I missing something?

I appreciate that it is all very well to be confident of the justice of one's position in not having been involved in a transaction at undervalue or a fraudulent preference, but in reality you would feel uncomfortable with a liquidator trawling over your transaction looking for opportuniies to reverse it.

So I would certainly be asking the vendor here whether or not it is his intention to put the vendor company into insolvent liquidation after completing the sale of the business to me.  If so, I agree that you must tread with care.

This may be a case for a pre-pack administration.

 

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Replying to InflatableBassPlayer:
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By frustratedwithhmrc
19th Mar 2013 14:49

Forgive me for being obtuse...

johngroganjga wrote:

With respect don't see how HMRC can seize a company's properties in payment of taxes.  What they can do is petition for the company to be wound up.  A liquidator is then appointed, whose powers to reverse past transactions are what I set out above - or am I missing something?

Obviously we are talking about legal proceedings through a court, either criminal or civil.

Essentially, this is at best an artificial arrangement to evade taxes that are rightfully owed and at worst fraud.

Neither of which should be very appealing to the buyer, regardless of the seller's opinion on the matter.

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Replying to InflatableBassPlayer:
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By Sksworld
19th Mar 2013 15:01

Pre Pack Administration

johngroganjga wrote:

This may be a case for a pre-pack administration.

Yes the vendor did mention this term, however I am not familiar with it? Can you explain further what this means please? Many thanks

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Replying to djn24:
By johngroganjga
19th Mar 2013 17:21

Pre-pack means that the sale of the business is negotiated in advance of the appointment of an adminstrator, with the involvement of the prospective administrator, and then implemented immediately on the appointment of the administrator.

That minimises a number of the risks for you, mainly because the adminstrator will only rubberstamp the deal if he is happy he can justify it as being in the best interests of the creditors.

If you want to explore that route, you and the vendor need to sit down with an insolvency practitioner.

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By Sksworld
19th Mar 2013 20:05

Thank you all so far

These comments have been very useful, thank to all who have taken the time to comment.

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By petersaxton
19th Mar 2013 15:56

Isn't it obvious?

"If I formed a new co (limited) paying 12k for the business is obviously a lot less than what t he stock is worth - is this not allowed?"

Of course not

The assets should be used to pay the debt to HMRC not practically given to somebody else.

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By macaulay147
19th Mar 2013 15:59

If company is profitable why are there debts due to HMRC are these historic or current liabilities?

If historic balances then I would be hesitant to purchase the current company and would advise purchasing the assets of the company via your own company. And as stated above make sure all deals are at market values so that if the old company does go into Liquidation there is no risk of the deal being reveresed. Purchasing the company through your own new company or an existing company or even trading as a sole trader would mean that you dont carry over the HMRC history of the old company which by the sounds of it might not be great.

If the current owners intention is to transfer the assets then just leave the HMRC debt in the old company then this would make me worried about his character and I would question any figures provided such as the 20% year on year growth that you mention.

 

 

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By macaulay147
19th Mar 2013 16:05

£12k!!

So youd make your money back in the first year on profits of £54k! Sounds very iffy to me. And yes if you purchased the stock only for £12k and the old company was then put into liquidation then there could well be issues.

How well do you know this person? How much do you know about this business?

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Replying to lionofludesch:
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By Sksworld
19th Mar 2013 20:10

How well do you know this person.....
.

It's a shame to hear of this business having such problems beneth the suface. After reading all the advice it certainly makes sense to go with a new co and purchase the stock and start a fresh. The only issue with this is that I don't have the stock value (70k) to pay to take over this way. I'm guessing any other potential buyers of this local bike shop may come to the same conclusion and won't have that sort of cash to buy into this business. I guess what will happen is he will close down, stock will be liquidated and no more local bike shop and another empty high street premises. Seems such a shame really.

  

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Replying to tom123:
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By frustratedwithhmrc
19th Mar 2013 17:39

Then go for a pre-pack through an insolvency practitioner

Sksworld wrote:
The only issue with this is that I don't have the stock value (70k) to pay to take over this way. I'm guessing any other potential buyers of this local bike shop may come to the same conclusion and won't have that sort of cash to buy into this business. I guess what will happen is he will close down, stock will be liquidated and no more local bike shop and another empty high street premises. Seems such a shame really.

If the only creditors are HMRC and they will be paid in full as part of the formal liquidation of the business, as will the insolvency practitioner, then it is a no brainer.

Advise your client to agree to a pre-pack purchase of the business through an insolvency practitioner at an agree price.

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By petersaxton
19th Mar 2013 17:44

It gets worse!

" she is no longer part of the business. (day to day)."

What does that mean?

It looks like the person you are dealing with doesn't own all the business!

Don't let your greed get you into a nightmare.

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Replying to Bhavina Carsane:
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By Sksworld
19th Mar 2013 21:08

Judgemental
Greed? That's a little judgemental Peter Saxton. I'm simply making enquiries from professionals whom can give a completely objective view and of course a good mix of opinions to help in my decision making process.

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By petersaxton
20th Mar 2013 00:05

But why

should anybody get involved in such a murky transaction if it wasn't greed? I'd love to get something for nothing - is that being greedy? - but I wouldn't wish to get involved with something that could have so many downsides.

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By Johnnydee6
23rd Jan 2015 11:00

Purchasing business as going concern
I am considering purchasing a business as a going concern including the property and am bit concerned as to the debts this company.I would be changing the name to my own company.Would I be liable for any debt.

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