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Neither lawyers nor accountants tell you –Things that you must notice when purchasing a company (I)

2022-08-30

To operate your own business, except for setting up a company, many entrepreneurs may decide to acquire an existing company to operate or expand their own business. There are many online platforms for selling and purchasing companies but usually, the companies’ information is too brief. There may even be some essential points that are not noticed after the acquisition process, leading to over-budgeted expenses. Therefore, Pacers would like to bring you to know more in order to avoid traps and all unnecessary costs when purchasing a company.

When you find your target company, you must first investigate its background.

1. Whether your target company is limited or unlimited will result in significant differences in the acquisition process and documents required.

a) When the target company is a limited company

If you are going to acquire a limited company, this means that the transfer of shares will be a required stage of the whole process, and the people you are going to negotiate with will be the shareholders. Therefore, you need to understand the total amount of shares, capital structure, and the percentage of your acquired shares to the company’s total shares.

If you want to find out more about your target company, you may conduct searches online through The Cyber Search Centre of the Integrated Companies Registry Information System (ICRIS) (https://www.icris.cr.gov.hk/). You can find the year of incorporation and the company number. You can also get a deeper understanding of what company secretary documents the company has submitted, and you can ask people of the target company to provide the documents. (If you want to obtain the certified copies from the Companies Registry, you may order copies from the Cyber Search Centre, which will be about $10 to $30 per copy.) 

Company Secretary Documents you should ask for

i) The most recent annual return (NAR1): Annual return is a document in which corporations are required to submit every year. It records details such as registered office, directors, company secretary, shareholders, amount of shares held by every shareholder.

ii) Articles of Association (AA): Articles of Association record the details of a company’s internal management, such as the appointment of directors and meeting agenda. Furthermore, the rights of the company and the regulation of its operation will be recorded, which helps clarify the responsibilities and rights of shareholders.

iii) Company secretary documents submitted after the most recent annual return (NAR1), including:

  • ND2A: Use for the appointment of new directors, company secretaries, or resignation of the existing director or company secretary.
  • ND4: Use for the resignation of the existing director or company secretary
  • NSC1:Use for the allotment of new shares

Other company secretary documents will be helpful for you to understand company’s history and development, but they will have no significant impact on the acquisition process.

b) When the target company is an unlimited company

If you are purchasing an unlimited company, it means that you are purchasing the business registration certificate. The certificate will not include any transfer of shares, but all the partners of the company will be listed. As partners are not offered the right to evict other partners, you should ensure that all partners of your target company understand the acquisition clearly and are willing to exit the company.

2. No matter what form of ownership that company you are purchasing belongs to, you should look at the company’s accounts. This is because buying a company is also taking away its assets and liabilities. Therefore, it is important to find all hidden obligations and avoid overestimating the company’s value.

a) When the target company is a limited company

If you are purchasing a limited company, there will be more documents you can refer to, and they will be more secure.

Financial Report: It reveals revenues and expenses of the company throughout the last financial year and the company’s assets and liabilities at the end of the financial period.

Audit Report: After conducting the audit process, accountants will deliver the auditor’s opinion, which will be recorded in the report.

Accounting to the Companies Ordinance, a limited company must prepare a financial report and auditor’s report every financial year. Furthermore, these two reports are required when handling stamp duty. Therefore, it is better to ask for reports from sellers before acquisition to avoid extra time and effort in preparing the reports.

Accounts: They include income statements and balance sheets, which show the financial situation of a company. If one wants to enhance the reliability of the accounts, one may appoint an accountant to perform the audit process.

b) When the target company is unlimited

As an unlimited company is not legally required to prepare financial reports and audit reports, there will be fewer referencing documents. However, you can still ask the seller to provide the accounting accounts submitted to the IRD (if the company’s income is less than HK$2,000,000, the company may have only been preparing income statements.) and the most recent accounts.

Conclusion

We would like to share the various matters of acquiring a company in detail. However, when we were preparing this article, we found that there were too many things to pay attention to. Therefore, we are going to divide them into two to three articles. We hope all of them could be helpful when you are acquiring a company.

Pacers is a diversified company providing professional consultancy services. We always think a step further for our clients. If you have encountered any difficulties when purchasing a company, please feel free to contact us directly on our website or email info@pacersconsulting.com. Want to hear more techniques and examples of company acquisition? Follow us on Facebook, Instagram, and Google now to stay on top of our latest news!

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