When purchasing a business, depending on what you are specifically buying and taking over, you will either purchase assets or shares in a business. What is a share purchase? A share purchase involves purchasing the shares of the company from the shareholders. On purchasing the shares, as a buyer, you take all of the company’s assets, liabilities, obligations. In private companies limited by shares, there are transfer restrictions for shares generally outlined in the company’s articles of association or the shareholders’ agreement. For instance, consent may be needed from other shareholders to waive pre-emptive rights. But other than that, in Hong Kong, there are no general legal restrictions on the transfer of shares in an incorporated company. To understand more about the transfer of shares, read Can I transfer the shares of my company?  However, if you are purchasing a company that is into the following sectors then the different rules will apply: InsuranceBankingSecurities and FuturesProvident FundTelecommunications Broadcasting What is an asset purchase? An asset purchase is the transfer of specific assets or employees relating to a specific business function. You are choosing what to purchase in the business, instead of purchasing the whole business. Thus, you can pick the assets you want from the business, or any liabilities you are willing to take on. This means the process of purchasing has fewer formalities than entering into a share purchase, where all assets are bought. You should also look to the articles of association (AOA) and shareholders agreement to look for any restrictions on the transfer of assets. The restrictions will usually be requiring approval from shareholders. Furthermore, the AOA should also detail the procedure for transferring the rights, permits and licenses, to continue operation in Hong Kong. Third-party consent may also be required if there are previous agreements that have to be

Due diligence is when potential buyers evaluate factors relating to a transaction, such as finances, assets, legal issues and external issues to gain a better understanding of the business. Essentially, it is a deeper dive investigation or audit into a specific situation/area relating to a business, that takes place before a formal contract is drafted and agreed on. It can be compared to when a house gets investigated before it is purchased. As for businesses, it may be financially disastrous if they fail to perform due diligence. How does this relate to purchasing a business? Due diligence is a process that the potential buyer of another business will conduct before entering into a contract to purchase a business. They then review and find information about the business they are planning on purchasing. This is especially important as you take over the liabilities and debts the business currently has and helps you to make an informed decision. Whether that information is found by the buyer or given by the target business, the buyer will review and verify the information. If after comprehensive due diligence, they are still interested in purchasing the business, then the negotiations will proceed. Moreover, the due diligence stage will include evaluating the target company. This determines how much your purchase price will be after taking into account all areas of the business. Why is it important to conduct due diligence? Due diligence must be performed before purchasing a business. A thorough investigation of the target business will ensure you do not get surprised after you enter into the agreement. It will help you to evaluate the legal, financial and commercial position of the business. If this is not done, you may encounter unplanned costs, which leads to a more costly purchase than expected. Thus, due diligence ensures you are making an appropriate and informed business decision. This ensures the purchase will be successful

Heads of terms are different from a formal contract. This document sets out the preliminary terms of a commercial transaction agreed upon by the parties in the course of negotiations. It ensures both parties are on the same page as regards the major aspects of the transaction and prevents misunderstandings. While you do not need to have a heads of terms document, it is advisable to have one when purchasing another business. This is because it may be more complex when dealing with an existing business operation, financials, culture and more. It will also help to detail all the main issues of the deal in the beginning, which lessens the chances of miscommunication and disagreements when drafting the formal contract for the purchase. Lastly, it will indicate your intention of buying another business. This will show that you are a serious buyer, which would be more attractive to potential sellers. Is it legally binding? No, heads of terms are not legally binding. While they show a strong intent to follow through with the agreement, it does not have any legally binding force. When would I use a Heads of Terms Document when purchasing another business? Heads of terms will be used during the negotiations to purchase another party’s business. It is usually used in the earlier stages before the two parties decide to be legally bound by a formal contract, and when they are serious about continuing the transaction. Thus, it will mainly be used to outline the proposed acquisition (purchase) terms agreed between the parties. Here are some things to consider clarifying when drafting a Heads of Terms: The proposed acquisition and what you are planning to purchase The price of the purchaseConditions involved (e.g. the purchase price to be conditional upon employees retaining their positions) Timing of negotiations and timeline for the future Due diligence Costs Governing law and jurisdiction of the transaction For more information on Heads of

Purchasing a business or a company indeed may be an easier option than starting your business from ground zero, but it is not an entirely automatic, straightforward process. Certain steps are typically involved in a business purchase transaction accompanied by their respective required legal documents. A business/company purchase transaction can broadly be divided into three main stages: Pre-purchase negotiationsPurchase of business/companyPost-purchase formalities Stage 1: Pre-purchase negotiations Generally, the first stage encompasses all the necessary what steps that need to be taken before purchasing the desired business/company. This stage mostly involves negotiations regarding, and in preparation for, the purchase and calls for various legal documents: Non-Disclosure Agreement A Non-Disclosure Agreement is essentially a contract whereby you and the seller agree not to disclose confidential information that has been shared between the two of you in the process of conducting business together. The information communicated between you, the purchaser, and the seller in the process of business/company transfer are no doubt extremely sensitive as they detail the finances, assets, debts, etc. of both parties. The process itself may also be confidential as the seller may want to circumvent any worrying of staff or clients from any leakage information about a potential sale of the business too early on in the process. Please see our Non-Disclosure Agreement template and easily customise it according to your needs. Due diligence checklist You will first need to conduct Due diligence on the business/company you are planning to purchase. This means investigating the business/company to make sure that you want that specific business/company, and to be aware of any potential drawbacks involved in purchasing it. For instance, drawbacks may include existing liabilities and debts that will be transferred to you after the purchase. Basically,

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? Advantages Disadvantages The product/service has already entered the market, resulting in a higher chance of successThe product/service may need significant improvements, which will increase costs There is already a brand that is established and followed, so the customer base is secured It may be more difficult to move the business in a different direction given the established branding Reduced startup time, giving you more time to focus on growing the business instead of establishing it (such as not having to incorporate your own