Buying a company for £20,000 from owner how it works?

Buying a company for £20,000 from owner how it...

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Hello all

I am interested in buying a cleaning company with turnover of about £60,000 for £20,000 from the owner who owns all the 10 shares in the company.

I wanted to know how would I treat this purchase?

Will I have 10 shares worth £200 each? will it be loan to the company? Will it be goodwill? 19900 Preference share?

Any expalination is greatly appreciated please.

thanks

Replies (17)

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By andrew55
06th Oct 2015 16:15

Get an accountant

Sorry but if you are going to part with £20,000 I would really suggest you go and get some good paid for advice.

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By petersaxton
06th Oct 2015 16:17

Shares already issued

You are just buying shares from a shareholder. It's nothing to do with the company. You really need an accountant for so many other reasons.

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paddle steamer
By DJKL
06th Oct 2015 16:31

Care needed

An accountant is useful re this, as is a solicitor.

When you buy the shares, and presumably take over the company,  it (the company) is still responsible for everything it did prior to your purchase of the shares; if vat/tax fiddled, now your problem, previous member of staff unfair dismissal/injury, your problem etc.

It would be a brave individual taking on all previous events without some form of warrantly/comeback against the seller, so professional assistance is a must here.

Caveat emptor

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Out of my mind
By runningmate
06th Oct 2015 16:40

Yes - get paid for advice

If you are purchasing all the shares in a company then what you are doing is paying money to the previous owner of the company (who will pocket it & walk away) & acquiring all the assets & liabilities of the company (whatever they may be).

You are not paying your money to the company.  You may not be getting anything of value for your money.

You really do need advice from a solicitor & an accountant about this.

RM

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By Tosie
06th Oct 2015 17:53

How much are you paying ?

Agree you need both an accountant and a solictor but it is not clear from your question whether you are paying two or twenty thousand. 

I would never advise a client to buy a company but there are ways of buying the assets without buying the actual company. An accountant will be able to discuss these with you and in my view it is better to see an accountant before a solicitor.

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By truckwala
08th Oct 2015 21:09

@tosie £20,000 What are the

@tosie £20,000 What are the other ways, please share using my situation.

Thanks I am going to see an accountant next wednesday howeverI wanted to prepare myself so I can uderstand more about the process.

I know that I am buying the shares from the previous owner who takes that money and walk away however I am interested about how can I show my investment in the company as I will be the only shareholder..

I know if I  make another company and that company buys this company for £20,000 and I'll show my investment as directors loan.

I want to educate myself so I can be a valuable client.

Also I am sure it would be benefficial to any student accountant visiting this forum part of their learnings.

Thanks in advance..

 

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By Tosie
08th Oct 2015 21:51

trukwala

This is a technical issue that can only be dealt with when all the circumstances of yourself ,the company and the current directors are fully known.

There is no one or simple answer.

The accountant will explore all the options but make sure that they are experienced in this sort of transaction as a wrong decision now could have long term consequences and £20 grand is a lot of money.

Good luck I hope all goes well.

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By petersaxton
09th Oct 2015 07:34

Accountant

As people have said you will need an accountant and these issues are what you are paying for him to deal with.

But as people have said: If you are buying the shares in a company any money spent doesn't affect the accounts of the company. With company shares traded on a daily basis every change in ownership doesn't affect the accounts of the company, does it!

"I know if I  make another company and that company buys this company for £20,000 and I'll show my investment as directors loan."

You know it wrong. Unless you mean you lend the "another company" £20,000 to buy the first company.

You are paying THE OWNER OF THE SHARES the £20,000. You are not paying the £20,000 into the company bank account. The only entry in the company books is in the share register that changes the shareholder from the seller to the buyer (you).

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By iamtrainee
10th Oct 2015 09:40

if you make another company

and do director loan of 20000 and that company buys the other company for 20000 . this way you can withdraw the 20000 anytime you want once the company bank has enough cash. Also as said earlier the company value dies not change if only shares are bought however there are alot if ways for the owner shareholder to choose a right course of action depending on the situation..

My 2 pence ;)

 

Before buying the business
Balance Sheet

Assets:
Bank        20,000

Less
Liabilities:
Director Loan    (19,999)
----------------------
Net Assets    1
-----------------------

Ordinary Share  1
--------------------------
Shareholder funds    1
-------------------------

After buying the new business for £20,000 with £5000 assets

Balance sheet

Assets
Goodwill    15000
Equipments     5000
---------------------
        20000

Less Liabilities
Director Loan    (19,999)
------------------------
Net Assets        1

Ordinary share      1
------------------------
Shareholder funds   1
------------------------

Another Method
Balance sheet

Assets
Goodwill    15000
Equipments     5000
---------------------
        20000

Ordinary share      1
Preference Shares 19999
--------------------------
Shareholder funds   20,000
--------------------------
This way the value of the company has increased

 

 

I am Trainee I am MOSTLY wrong and thats how I learn.

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Replying to stepurhan:
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By User deleted
12th Oct 2015 09:46

Shares vs Trade

iamtrainee wrote:

I am Trainee I am MOSTLY wrong and thats how I learn.

 

The vendor wants to sell the shares in his company - not his trade.

 

Your proposal would be achievable - but you have to add the middle step of acquiring a subsidiary and stripping the assets and trade out, via a hive-up

 

- so I would say PARTLY wrong

 

 

With regard to the company value increasing - issuing preference shares is not preferable to holding a £19,999 loan balance that can be drawn own tax-free.

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By petercooperuk
10th Oct 2015 19:14

I've done this before without a solicitor and an accountant only playing a role of me asking occasional questions. There are steps you need to take in a certain order, it's not impossible if you do your research but it's a LOT of work that is easy to screw up.

The things you want to make sure you don't screw up (and this is why people say to get a solicitor and accountant) are the due diligence (you do NOT want to own a company up to its next in debt or with major problems), the contract (you need to cover your [***] - this is what solicitors are good at unless you have a solid footing in contract law yourself), and doing things like becoming a director, having the other director resign, doing the share transfer, letting HMRC know and paying the stamp duty, updating Companies House, bank mandates, potentially striking off the other company... there's a process to all of this and unless you are very interested and motivated to learn about and do it all yourself, as I was, professionals will be able to help.

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By Tosie
12th Oct 2015 13:19

Observation

When I worked for a large  sized firm of chartered accountants if this sort of situation came up it was dealt with at the highest level with all sorts of check lists, due diligence and goodness knows what. It would then be submitted to a specialist for approval.

Granted the numbers were much higher but for some people £20k can be a life changing amount and it is essential that you get proper advice.

There is no one answer.

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By iamtrainee
14th Oct 2015 00:31

@Tosie what would you
suggest.. say everything is in order and the seller are not bothered what happens to the company whether the buyer buy the shares or the business they are only interested in receiving the £20,000. and the Buyer is only interested in the business and want to buy it via newly created company investing the purchase price as directors loan aa suggested above that can be withdrawn taxfree later on and want to desolve the old company.

Thanks..

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Replying to Lone_Wolf:
By johngroganjga
14th Oct 2015 08:14

Tax

iamtrainee wrote:
... the seller are not bothered what happens to the company whether the buyer buy the shares or the business they are only interested in receiving the £20,000 ...

There is a big difference to the vendors, taxwise, between their company selling its business and them selling their shares in the company. I can't see how they wouldn't be "bothered" about that. In any event we are told that this is a share sale. 

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By Tosie
14th Oct 2015 06:08

iamtrainee

I know what you are saying but still think op needs an accountant to explore more than one option.

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By johngroganjga
14th Oct 2015 08:03

And a lawyer to ensure that the vendor gives good title and provides all the appropriate warranties and indemnities.

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By petersaxton
14th Oct 2015 08:11

or nobody

if you want to mess it up.

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