1. Not Defining What You Are Buying You may have an idea of what you’re buying, and the target may have an idea of what they are selling, but as you can imagine, too young and inexperienced lovers (apologies for the terrible analogy), trying to model something without actually knowing what they are doing is a recipe for disaster. There are a number of areas of misunderstanding, are you buying the shares in the company or are you just buying the assets? Are you buying some of the assets or all of them and are you taking on the liabilities? If you are buying the shares, what will be left on the balance sheet and how much would be taken out? How much of the Target company to treat as a distribution prior to the sale? In order to avoid these problems, you need to be completely clear about what you are buying. If you are buying the asset, and if you find a company you need to define exactly what the balance sheet would look like post sale. As an accountant, I like numbers, and it is clear to me if you have defined exactly what you were buying. Many vendors believe the cash in the company is theirs, while the acquirer might think that money will be used to finance the business going forward. These are genuine misunderstandings that need to be sorted out. 2. Using The Wrong Entity For Buying A Business You must first decide if you are buying the assets or the shares. Also, if you are buying the assets personally or in a limited company as the taxes are very different. If there are deferred payments, how does this work and what are the specific guarantees being given? I am normally a fan of acquiring assets, not shares. If you acquire the shares, you also acquire potential liabilities that are within that company. For example, if the previous owner has made mistakes on VAT, or PAYE, or has disagreements with the amount of what they are owed or owe, you take on all those obligations.
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