Buying a share in an existing business: advantages and features

In today's business environment, more and more investors are turning their attention to the possibility of acquiring a share in an existing business instead of buying the entire company. This approach has a number of significant advantages that make it attractive to beginning entrepreneurs and experienced investors.

A share in a business is a value that is attributed to one of the owners at the time of distribution of the company's assets (e.g. distribution of profits). The size of the share is calculated based on the initial contribution of the shareholder at the time of registration of the company, at the stage of formation of the authorized capital.

Buying a share in a business is often called the acquisition of a package of shares or assets of a company. The terminology and method largely depend on the structure and terms of the investment.

Buying shares

When buying shares in a company, the buyer is buying a part of that existing company. This includes all components of the business (i.e. traded shares, work in progress, fixed assets and intangible assets) that are taken into account in the price of the shares. It also includes other assets and liabilities of the company, such as cash in the bank, outstanding debt, vacation pay accrued to employees, etc.

Buying a share in shares allows an existing company to continue to operate as it is, without changes. For example, all bank accounts remain in the name of the existing company; all employees remain employed by the existing company; all assets remain the property of the existing company; all existing contracts with suppliers or customers remain in effect based on the contracts already signed; all debts remain with the company, etc.

Selling shares is usually more tax-efficient for the seller.

Asset Purchase

The main advantage of choosing an asset purchase is that the buyer does not necessarily assume any of the seller's liabilities other than those that are transferred to them by operation of law. This is because the purchase only covers a portion of the assets that make up the business.

Asset purchases involve less risk for the buyer.  You can structure the purchase in a way that suits you, buying only the assets you need. When purchasing assets, it is usually easier to conduct due diligence, since the buyer is only interested in the assets, not the entire financial history of the business.

Main Benefits of Buying a Share

Reduced financial risks are one of the key benefits. Acquiring a share allows you to:

• Invest less money.
• Distribute risks with other owners.
• Test the business model without full immersion.
• Save capital for other investments.

Access to a ready-made business includes:

• Working with established business processes.
• Having an existing client base.
• A functioning team of specialists.
• A proven business model.
• An established reputation in the market.

Management flexibility is manifested in:

• The ability to gradually increase the share.
• The ability to influence decision-making.
• The ability to study the business from the inside.
• Opportunities to gain experience from current owners.

Practical aspects

The legal side requires special attention:

• Careful analysis of constituent documents.
• Auditing financial statements.
• Assessing the company's liabilities.
• Agreeing with other owners.
• Registration of the transaction through a notary

Financial terms may include:

• Fixed price of the share.
• Payment in installments.
• Participation in the company's profits.
• Compensation for future achievements.
• Bonuses for increasing the value of the business.

Examples from the Russian practices

Restaurant business

In 2023, a famous chef acquired a 40% stake in a premium restaurant chain in Moscow. This allowed him to:

• Get access to a ready-made business with a reputation.
• Save his own funds for the development of new projects.
• Study the specifics of network management.
• Implement his own concepts into the menu.

IT sector

A young entrepreneur acquired a 25% stake in a startup developing mobile applications. Benefits:

• Access to a team of experienced developers.
• The ability to influence the direction of development.
• Risk sharing with founders.
• Getting a share in future income.

Retail

The investor acquired a 30% stake in a chain of cosmetics stores. Result:

• Quick entry into a profitable business.
• The ability to scale the network.
• Access to the existing customer base.
• Saving on marketing costs.

Risks and limitations

The main risks when buying a share:

• Conflicts with other owners.
• Differences in the vision of business development.
• Difficulties with exiting the business.
• Limited control over decisions.
• Possible hidden obligations.

Ways to minimize risks:

• Thorough business due diligence.
• Drawing up a detailed agreement.
• Establishing clear KPIs.
• Regular audit of financial indicators.
• Availability of a mechanism for exiting the business.

Decision-making process

Stages assessments:

• Analysis of the company's financial condition.
• Assessment of the market position.
• Checking the legal purity.
• Study of business processes.
• Assessment of the management team.

Selection criteria:

• Business transparency.
• Growth potential.
• Reputation of the owners.
• Consistency of the development vision.
• Financial indicators.

Buying a share in an existing business is a reasonable alternative to buying a ready-made business in its entirety. This approach allows you to minimize risks, gain access to a ready-made business and gradually increase your influence in the company.

With the right approach and careful analysis, such an investment can become a successful start for developing your own business or an effective way to diversify your investment portfolio.

Recommendations for investors

Important tips:

• Conduct a comprehensive business audit.
• Conclude a legally sound agreement.
• Study the market and competitors.
• Evaluate growth potential.
• Consider the cultural characteristics of the team.