Mitigating risk when buying an entire company's shares

You’ve seen a company which looks a great fit for your business.

You’ve crunched numbers, made an offer to buy the entire issued share capital of the company and it has been accepted.

What could possibly go wrong?

Buying the entire issued share capital of a company means buying it lock, stock and barrel. The value of what you are buying is impacted not only by the value of its assets but also the extent of its liabilities.

Issues with assets may make them less valuable than expected, for example, land and buildings may be subject to restrictions.

There may be liabilities you weren’t aware of or are greater than you anticipated.

In short, the risk any buyer purchasing company shares faces is the value of the company may not be as expected.

How to mitigate risk

These risks can be mitigated in two ways. The first is to carry out proper due diligence for both legal and financial issues.

This involves asking extensive questions, analysing the responses and documents provided and asking follow-up questions as needed.

The second is to seek warranties. Warranties are a series of statements of fact about the affairs of the company.

The objective is you can claim compensation for breach of warranty if it turns out any warranty is incorrect.

The sellers can disclose any exceptions to the warranties in a disclosure letter provided before contracts are exchanged. Where the seller fairly discloses an exception, there is no claim.

This process both helps flush out what you need to know before you commit and gives you the recourse you need in relation to issues you are not told about.