In the last few months I’ve been helping several people as they purchase businesses. At the same time there have been other clients who are selling their business. It seems like for both sets of people there are some basic questions that they always have. This article tries to answer and clarify with some answers to some of the common points regarding the usual process involved and what documentation is required. A part 2 then deals with what the agreement for sale and purchase would normally cover. While this is written from the point of view of a Purchaser, it will also raise the same issues that a Seller will need to think through.
So, what are you actually buying?
One of the first things to think about is what you are actually buying. This can be confusing but think about it this way – are you buying the assets of the company, or the company itself? It is very common in New Zealand to simply purchase the assets and the business rather than the company. This is because if you buy the shares of the company then you are stepping into the shoes of that company – which means you get what it owns but you also could get what it owes. So the key here is to be clear about what you actually want and the usual advice would be that purchasing the business and assets is best. Having said that, there may be reasons why purchasing the shares of a company is necessary and you actually want to take on board all that it has – including licenses and registrations – so every situation needs to be thought through.
Due diligence …
It is one thing to see an opportunity and have some chats with the founder of a business about how great it is going. It is quite another to do extensive due diligence and satisfy yourself that everything is as claimed. A good due diligence process will bring to light anything which you need to be aware of as a purchaser. For example, the founder may have told you that they have both great suppliers and customers – is that all verbal agreements or are there robust agreements in place which specify how those relationships are governed? What licenses are in place – or not in place? What disputes are there or litigation or potential claims? What do the accounts reveal? Is the lease about to expire? How about relationships with employees?
What does a due diligence involve?
A good due diligence process will see the Seller provide access to all the key documents of the business so you can thoroughly examine them. This will likely involve advisers such as accountants and lawyers to look through documents. If you are considering selling a business then the counterpoint here is to keep good records. How many times have I been involved in due diligences where the Seller has no records of decisions or no contracts in place? Far too many times – a Purchaser will be scared off if you cannot show clean records and processes. And if you are a start-up, begin keeping good records right from the start, it will make it far easier to get investors or sell out later on.
Other things to thing about…
There are many other points which we could cover and some hints are: Which employees will come over? What are the actual assets? Is the price sensible when looking at the accounts? Given the industry is there any potential for large claims or liability? What is the goodwill actually worth? Is there a reason they want to sell now? What future changes might there be in the industry that will affect the business?
I hope this is a helpful overview of some of the things to think about when buying – or selling – a business. In part 2 we will look at what the agreement for sale and purchase should cover. In fact the issues and things that need to be thought through will be the same no matter how many zeros there are on the end of the purchase price. The key thing is to remember that every transaction will be unique and so it is important to take a customised approach to what you ask for in the agreement, whether you are a buyer or seller. If you’d like to talk about your plans then I’d be happy to have a chat or drop me a line at firstname.lastname@example.org