When you are in an LBO execution project, one of the important questions you have to ask yourself is whether to buy the company or a branch of activity.
The difference is not only legal. It impacts risks, operational integration, contracts and especially tax aspects.
If you acquire the company, you continue with all the legal entity intact: licenses, clients, suppliers, contracts, obligations, etc.
Operationally it is very comfortable, but it has its counterparts because along with everything you know you are interested in, you also inherit obligations and risks: hidden debts, past litigation or tax contingencies. In both cases it is necessary, but in this one especially, to have a powerful due diligence.
If, on the other hand, you buy a branch of activity, you choose which elements of the company you will keep: machinery and installations, contracts, brands that interest you, etc. The legal entity of the target continues to exist and to be in the hands of the seller and you must necessarily create a new one. In exchange, you do not carry over liabilities from the seller’s past and you can delimit very precisely the fiscal responsibilities. In exchange, it requires more work: renegotiating contracts, new licenses, etc.
In short, if it is a very complicated business in terms of licenses, accreditations, complex contracts, and all kinds of aspects formally linked to the legal entity, it is better to save work and buy the company.
If the above is limited and you prefer to “start from scratch” as far as risks are concerned, buy the branch of activity and use the protection tools provided by the tax legislation.
Since a deal is a deal, and there are always at least two parties, all of this must also create value for the seller. In this case, the difference between one model and the other also has implications, which can make the seller choose one or the other. And then, negotiation arises again. Sometimes, though, the same solution is in the best interest of both.
