Top five issues to consider when buying a hire or rental business
This article was originally published by Hire and Rental News, Nov 2018, Vol 20. Page 18
There are several ways to make inroads into the equipment hire and rental business. For example, you could buy the equipment to be hired out, commence marketing activities to attract a customer base and build the business from the ground up.
Alternatively, you could take over an existing hire business. This could be done in one of two ways:
acquiring the assets of a hire business and taking over its existing operations; or
acquiring the shares in a company which operates a hire business.
There are different legal and tax considerations in both approaches. You should seek professional advice about which approach is ideal for you. Buying assets (as opposed to buying shares) will normally mean more work in transferring those assets, as discussed below. On the other hand, buying shares means the risk of inheriting the liabilities of the company being bought.
In this article, we explore the top five issues to consider when taking over an existing hire business by way of an asset purchase.
1. Ownership of Assets
Does the seller of the business own the equipment which it is hiring out to its customers? If so, these will need to be transferred to you at completion of the sale.
If the seller does not own the equipment, but is leasing it from a third party, then you will need to ensure that those leases are transferred to you. Alternatively, you could negotiate new leases for the equipment and ensure the seller pays out the finance.
You should also consider what other valuable assets the business has, which you need to operate the business, such as customer databases and other intellectual property.
Before settlement, you should search the Personal Property Securities (PPS) Register to determine if there are any security interests registered against the seller. If there are any PPS interests registered, these interests should be released before settlement. If you do not do this, you may find that someone else has an interest in the equipment you are buying and could take it away from you, even if you have paid full value for it.
2. Customer Contracts
Has the business got existing contracts with customers for equipment hire? If so, these contracts will need to be transferred to you at completion of the sale. If you fail to do so, you may not be entitled to the hire fees payable by the existing customers who have currently hired equipment from the business.
You may also want to review the business’ standard terms and conditions for hire. Generally, terms and conditions should not contain any unfair terms as you will be unable to rely on them and may become liable for compensation. The terms of business of the seller may lean on whether you need the customer’s permission to transfer.
Additionally, you may wish to ensure that you are adequately protected in respect of PPS. Once you take over the business, you must register any PPS interests you have against customers where the hire is for more than 24 months. For hires that started before 20 May 2017 more onerous provisions apply.
3. Physical presence
Does the hire business operate from a physical premises? And if so, do you wish to continue using it?
If the seller owns the premises, but does not want to sell you the property, you should negotiate and enter into a formal lease with the seller, which is effective from completion, so that you can continue to use the premises.
If the seller rents the premises from a third party, you may need to have the existing lease assigned to you or negotiate a new lease with the landlord. If the premises are important to the business, you may want to make this a condition of the sale, to allow you to terminate the sale contract if you fail to secure the lease on terms which you are happy with.
4. Online presence
Does the business have a website? Does it use the website to conduct business? A domain name is an important asset that you want transferred to you at completion. If the domain name is not transferred, then your customers may continue to visit the seller’s website if you do not make alternate arrangements.
If a domain name and website are to be transferred, you should also ensure that all intellectual property in the website is also transferred to you. If the website requires any materials to be licensed from third parties, steps should be taken to ensure that those licences are assigned to you from completion onwards. You should also consider whether the business has any social media accounts (such as Facebook, Instagram, LinkedIn etc.) which should be transferred to you at completion.
Does the business have employees? Employees can be critical to a business. In some instances, failing to secure key employees may lead to breakdowns in important relationships or huge gaps in knowledge. This makes it important to identify which employees are critical to the business and why, to enable you to decide whether you should take on some of the seller’s employees or look at ways to replace them to ensure continuity of business.
In most instances, sellers are more than happy for you to take their employees to avoid paying redundancies. Most sellers will insist that (i) employees be offered employment on terms no less favourable than their existing terms, and (ii) you recognise the transferring employee’s service with the seller. This means that you will need to carefully review the existing terms of employment of each employee which you intend to take on.
As part of recognising continuity of employment, and under legislation, an employee’s accrued entitlements will transfer unless they are paid out before the employee comes across. Please note however that long service leave may need to be addressed separately from other types of entitlement as employees may not become entitled to long service leave entitlements until after they join you. This is especially relevant where there are employees who have been with the seller for a significant time and can lead to very complex arrangements being made. You may wish to negotiate a price reduction for the value of the liabilities which you assume as buyer.
Please note that these are not the only issues to consider when buying a business in the hire and rental industry. Depending on circumstance, these may move into the background as you and your advisors negotiate the purchase.
Authors: Oliver Shtein, Eric Kwan, Priti Joshi