Taking over a limited liability company – when is it worth the risk?
Taking over a company rather than setting up your own one sounds like an attractive proposition for shareholders, yet there are both advantages and disadvantages to be had here for you as a shareholder.
What I would like to do in the following post is give you an idea of what you should consider when buying an established limited liability company.
What are the advantages for a shareholder of taking over a limited liability company?
Taking over a limited liability company saves you as a shareholder from having to do a lot of ground work. Some of the advantages include the following:
- No share capital contribution
As the company has already been established, the requisite share capital has already been paid in. What this means for you is that you do not need to invest any funds to establish a limited liability company and instead you can get started immediately with your ‘new’ company.
This is, however, only an advantage if the purchase price is lower than the share capital contribution. Make sure you closely inspect the books and the future prospects of the company if the purchase price of the limited liability company is indeed as low as that.
- Existing articles of incorporation
The same applies here: Articles of incorporation were drawn up when the limited liability company was established, which you can now simply adopt (and adhere to!).
Make sure that the provisions contained therein actually reflect what you want.
- Immediate limitation of liability
Moreover, in the case of an established limited liability company, the limitation of liability is effective immediately, meaning that you avoid the so-called ‘pre-company phase’.
- No need to search for employees and production machinery
You already have the employees and machinery required for production, which means that you do not have to take any steps here. Taking over a limited liability company thus saves you as a shareholder a lot of time and effort.
- Market data available
As the limited liability company was founded before you took it over, the company was able to gain some experience in its field of work, which you as the new proprietor can draw on instead of having to start from scratch.
- Image-boosting history
The fact that your future company may have already existed for several years or even decades plans right into your hands as a shareholder. You can use these many years of experience to promote the company.
What additional action do you need to take during a takeover?
What you as a shareholder and future proprietor of a limited liability company must do is draw up a purchase agreement. This is the only way for you to take legitimate possession of your company.
You should also find out about the financing options available to you. When buying a company, these are similar to those available to founders.
Under Section 613a of the German Civil Code (Bürgerliches Gesetzbuch), you as a shareholder are not required to find any new employees when taking over a limited liability company, but you are required to keep the existing ones. You do not have the right, as the new owner, to amend existing employment contracts in your favor. When you take over a limited liability company, not only are you buying what it does but also who does it.
Source: https://www.gesetze-im-internet.de/bgb/__613a.html, September 21, 2018.
I set out the options available to you when taking over a business and its employees in my post entitled: “Knowledge for business owners: Do you have to keep all employees when taking over a company?” If you are interested, just click on the following link to be redirected to the post: Knowledge for business owners: Do you have to keep all employees when taking over a business?
What are the potential risks you face when taking over a company?
The list of risks that you may face when taking over a company is just as extensive as the one of your advantages. When buying a limited liability company, you should bear the following four points in mind:
- Employees and their pensions
When you acquire a limited liability company, you are the new, official employer, which means you are required to both keep the existing employees and make payments for their pensions. The contracts agreed with your employees must not be changed.
- Incorrectly stated enterprise value
Before taking over a limited liability company, you should first assess the value of the company in question. There are many factors to consider (e.g. sales figures, equipment, liabilities) when determining the value of company.
Throughout this process, remember: While trust is good, control is certainly better. If you only realize after making the acquisition that you were given an incorrect enterprise value, then it is already too late. You are the official owner of the limited liability company – regardless of how much it will cost you in the future.
- Liabilities and creditors
When taking over a company, you also step as shareholder for the company’s obligations. That means: If the company has amassed debts and owes creditors money, you are required to service and pay these off as the proprietor of the limited liability company. It is immaterial whether you knew about them or not.
- Future taxes payable for previous years
Don’t be blinded by the company’s success when buying it. You may be liable for taxes in the future as the new owner of the limited liability company, depending on how much income was generated in previous years, which means that you must bear these additional costs in mind when making your decision.
When does it make sense to take over a limited liability company?
I would recommend you take over an established company if you are fully committed and you really want to take over the business. In such cases, the legal form (e.g. limited liability company) should not generally represent a barrier for you. Limited liability companies often come with a number of business-related advantages if you take the “right” approach.
It could also open the door to a number of other favorable options for you: If, for instance, the limited liability company has loss carryforwards, this will (put simply) reduce the taxes on your profits in the near future. This will allow you to position yourself in an economically favorable way in the meanwhile.
The potential for tax-free distributions from the existing limited liability company also means more profit for you at the end of the day.
Conclusion: Takeovers with full commitment and solid figures
Whether it makes sense to take over a limited liability company or not must be determined on a case-by-case basis. As set out in this post, both financial and personal factors are very important here.
If you are toying with the idea of buying a company, I can only recommend that you first work out what the advantages and disadvantages are. Only with solid and reliable figures, together with the proper tax services, can you determine whether buying a company is the right thing to do.
Photo: © Syda Productions – Fotolia.com