While starting a new business can be intriguing and exciting, the big downside is that you have to start from scratch. This is why some people opt to purchase an existing and established business instead.
This means that instead of setting up a completely new business from the ground up, you are skipping all the preliminary steps such as registering your business and coming up with your own business plan/idea. You will be paying to acquire or take over an already operating business.
In the case of an incorporated company, this will either be in the form of purchasing all the shares in that company. You will take on the company’s obligations, liabilities and existing agreements.
Or, if you only want to buy certain businesses under a company or a business under the sole proprietorship/partnership modes, you can pick and choose which liabilities and assets to purchase instead of buying the shares. This will be a transfer of business, without any transfers of shares relating to a holding company.
It is a complex process involving due diligence to verify financial information, identifying risks involved, signing a confidentiality agreement, memorandum of understanding, sale and purchase agreement etc… Therefore, you should seek legal advice if you plan to purchase an existing business especially if the business is owned by a company.
What are the advantages and disadvantages of purchasing an existing business?
Are there any regulations I have to follow when purchasing a business?
Yes, the transaction of purchasing a business, whether incorporated or privately owned, is regulated by the Transfer of Business (Protection of Creditors) Ordinance (Cap 49). When purchasing a business, you as the purchaser will be liable for all obligations and debts related to operating the business unless some procedures are followed according to the Ordinance. For example, one procedure includes not taking longer than 4 months (and not less than one month before the transfer is valid) to publish a Notice of Transfer of Business in the Government Gazette.
Here are some important things to bear in mind according to the Ordinance:
- When the business is transferred, the one who buys the business becomes liable for all obligations and debts. This includes any tax liabilities that are related to the business operations by the seller
- This means that if the business has any outstanding creditors, they can demand the new buyer to pay the debts that came from the seller prior to the purchasing of the business
- However, Section 4 of the ordinance states that the buyer will not be liable for the obligations and debts from the seller, if the buyer gives the notice of transfer in the government gazette
- You have to give the notice of transfer not more than 4 months prior the date of business purchase, after the business is transferred. Also, not less than 1 month before the business purchase has become complete. The notice of transfer will be completed 1 month after it is published in the government gazette
- The ordinance mainly protects creditors involved in the business and the buyer as well. Therefore, the buyer should utilise the protection given to them in the ordinance to feel more secure in future endeavours and to avoid unexpected liabilities
Key Takeaways
- Besides starting your own business, you can also choose to purchase an existing business instead
- Doing so has multiple advantages such as established branding and consumer base, but you should also consider the disadvantages
- The transfer of ownership is regulated by the Transfer of Business (Protection of Creditors) Ordinance (Cap 49)
