16 January 2023
Purchasing a UK business from Overseas : The Opportunities and Pitfalls
Despite it being prevailing sentiment for many commentators that Brexit, and subsequently COVID, have hit the UK particularly hard in recent years, the island nation has arguably never been a more appealing investment opportunity.
Their hesitancy is not entirely unfounded. The British Pound has fallen considerably in relation to the US Dollar in the years since the Brexit referendum whilst the FTSE 100, a barometer of the UK stock market, has been almost flat. In the same time period the S&P 500, the most reliable indicator of the US stock market, has embarked on a historic upward rise and is only now showing signs of faltering.
Whilst a historically weak currency and stagnant stock market values might indicate to some Britain as part of the world to avoid, that very much depends on who you are and where you are based.
Continuing the comparison with our friends across the pond, let us assume you are an American investor. Given the supreme performance of American companies over the past 5 years, you might well be feeling that there is no reason for you to move abroad now. However, year after year of consistently excellent growth has left the American market extremely expensive. The price to earnings ration of the S&P 500 is currently around twice that of the FTSE 250 (the broader UK stock market index and a more reliable indicator of the UK market than the FTSE 100). To put it another way, to buy an American company, you would pay, on average, twice as much per Dollar of profit as you would for a British company. British companies have never been cheaper and that is before you even take into account the relative weakness of the Pound. If you are an American investor, your Dollars have never gone further on British shores.
The opportunity is there but, that said, there is much that a prospective foreign investor ought to be aware of.
The first is the matter of currency. Broadly speaking, the British pound has lagged behind the world’s major currencies though that is not a blanket truth. Furthermore, the Pound has been particularly volatile in recent years as the UK navigates the new geopolitical space it now occupies. Investors should be keenly aware of the currency with which they would be buying a UK-based company as well as the currency in which the company will generate its income.
Investors must also be wary of the differences in tax between their home nation and the UK. The UK corporate tax rate is 19% which is relatively low when compared to many developed nations. Purchases of UK companies will also incur a levy of what is known as Stamp Duty, a government tax which amounts to 0.5% of the total purchase price.
There is also the matter of the law that will govern the transaction. Whilst, as the buyer, you would be able to use the law of your home nation, depending on the size of the target company in the UK, the sellers may find it difficult to find representation to match. As such, it is often most prudent to rely upon the law of England and Wales to govern the transaction, instructing a UK-based solicitor in the process. We at Cook Corporate specialise in mergers and acquisitions and we have acted on an increasing number of transactions involving overseas purchasers in recent years.
In choosing English law, it is important to be aware of some aspects of it that may not apply in your own country. The first of these is caveat emptor or ‘buyer beware’. Under English law, it would be for the buyer to carry out the necessary due diligence in determining whether the transaction was indeed something they wanted to go ahead with.
There are also a number of different ways in which a deal might be structured. It could come in the form of a Share Purchase Agreement, whereby you purchase all of the issued shares of the company. Alternatively, it could be an Asset Purchase Agreement in which you purchase all of the assets of the company but not the company itself. In either case, the contracts will contain various warranties and indemnities designed to protect you as the buyer from various eventualities that might take place or come to light either during the transaction or after the fact. Here at Cook Corporate, we pride ourselves on our ability to take you through these agreements and make sure you understand where you stand, regardless of where you are based.
Here at Cook Corporate Solicitors, we have certainly seen an increase in overseas buyers acquiring UK companies in the last 12-24 months and have been involved in some very interesting transactions as a result. There is always a practical challenge when the buyer and their advisors are in a different time zone but, as corporate lawyers, we are well used to burning the midnight oil! There is definitely unlocked value to be found in the UK and, whilst the risks are there, fortune has always favoured the bold.