Acquiring another business is one of the fastest ways to grow — but it's also one of the most complex transactions you'll ever undertake. Getting the accounting and tax treatment right from the start can save you tens of thousands of pounds and avoid nasty surprises down the line.
This guide focuses on the practical accounting considerations for small business buyers — not the legal or strategic aspects, which require specialist advisers.
Asset Purchase vs Share Purchase
The single most important decision in any acquisition is whether to buy the assets of a business or the shares of the company. Each has very different accounting and tax implications.
| Factor | Asset Purchase | Share Purchase |
|---|---|---|
| What you buy | Specific assets and liabilities | The entire company (including all liabilities) |
| Hidden liabilities | Generally not inherited | All historical liabilities inherited |
| Tax position | Step-up in asset values (beneficial) | Inherit the company's tax history |
| SDLT/Stamp Duty | SDLT on property assets | 0.5% stamp duty on share price |
| VAT | May apply to assets (TOGC relief possible) | No VAT on share purchase |
| Capital allowances | Can claim on asset values | Continue existing allowances |
| Seller preference | Often less preferred (more tax) | Usually preferred (CGT treatment) |
| Buyer preference | Usually preferred (cleaner) | May be required for contracts/licences |
Understanding Goodwill
Goodwill is the difference between the price you pay for a business and the fair value of its identifiable net assets. It represents intangible value — brand reputation, customer relationships, workforce, and market position.
Goodwill = Purchase Price − Fair Value of Net Assets
Example: You pay £500,000 for a business with net assets of £200,000
Goodwill = £500,000 − £200,000 = £300,000
Tax Treatment of Goodwill
- Asset purchase (goodwill): Amortisation of purchased goodwill is generally not tax-deductible for UK companies (post-2015 rules). However, you may be able to claim relief on certain intangible assets.
- Share purchase: No goodwill is recognised in the acquiring company's accounts (it sits in consolidated accounts only).
Financial Due Diligence: What to Check
Before completing any acquisition, you need to thoroughly review the target business's financial position. Here's a structured checklist:
Revenue Quality
Profitability
Balance Sheet
Tax & Compliance
Business Valuation Methods
| Method | How It Works | Best For |
|---|---|---|
| EBITDA Multiple | Multiply normalised EBITDA by sector multiple (typically 3 - 8x for SMEs) | Established profitable businesses |
| Revenue Multiple | Multiply annual revenue by sector multiple (0.5 - 3x) | High-growth or loss-making businesses |
| Asset Value | Net asset value from balance sheet | Asset-heavy businesses (property, manufacturing) |
| Discounted Cash Flow | Present value of projected future cash flows | Businesses with predictable cash flows |
| Comparable Transactions | Based on recent similar business sales | When comparable data is available |
Post-Acquisition: Integrating the Accounts
Once you've completed the acquisition, you'll need to:
- Set up the acquired business in your accounting software — or migrate their data into your existing system
- Establish opening balances — based on the completion accounts or balance sheet at acquisition date
- Align chart of accounts — so you can produce consolidated management accounts
- Review and renegotiate supplier contracts — you may be able to consolidate purchasing
- Notify HMRC — of any changes to company structure or ownership
⚠️ Always use professional advisers
Acquisitions are complex and the consequences of getting the accounting or tax treatment wrong can be severe. Always engage a specialist M&A accountant and solicitor for any acquisition — the cost is a fraction of what mistakes can cost you.