You might be thinking about acquiring a new business to increase your current portfolio, diversify or increase efficiency of your current business. Whatever the reason, it is essential that you carry out the appropriate due diligence to ensure the business is right for you and to ensure that the business will match your expectations particularly with regards to its profitability. Failing to carry out the appropriate due diligence could result in you acquiring unknown liabilities or other issues within a business. The general rule at law is known as ‘buyer beware’ and it is for the buyer to ensure that they make appropriate enquiries into the business they are looking to acquire.
Choosing the right business will mean that you will need to conduct enquiries into various aspects of the business (‘the Target’) in order to ascertain how the business might perform in the future and determine your exposure to potential risk as a result of the acquisition. Your research should include the following:
Finance – This provides an insight into how the Target business is doing financially, if the Target business is viable and will continue to be profitable in the future. The financial information will include the business/company’s cash flow, net income, and revenue allowing you to predict the growth potential. You ought to request both the statutory accounts and any management accounts associated with the business as well as at least 12-24 months bank statements to reconcile the accounts position with the available cash flow in the business. Without the financial information you cannot ascertain whether you will be buying a bottomless pit of debt or a viable and profitable business.
Management team: They are responsible for the day to day running of the business and therefore it is essential that you research the management team of the Target business you intend to buy. What is their track record? Will they stay on board post completion? What skill and expertise do they bring to the business? Do you need to hire new people? Will the Sellers stay on and if so in what capacity? If they do will their interest align with yours? These are just a couple of thought provokers that you should be considering when reviewing the existing Management team.
Structure: The Business form will determine how the deal will be structured and whether you will buy the assets and goodwill of a business via an Asset Purchase or the Shares in a business via a Share Purchase mechanism. In an Asset Sale you will be acquiring the assets, rights and in certain circumstances you will assume the responsibility for some liabilities relating to the target business. In relation to a share purchase you acquire all or a majority of the shares in the target company which carries on the business of the target business. A Share Purchase can only be used in the sale of a company, but an Asset Sale can be used in any business sale including a company sale.
In an Asset sale you can cherry pick the assets, and rights you want to buy. This does not imply that other forms of business (that are not registered companies) are not suitable businesses to acquire. Although both structures will transfer the target business to the buyer; there are legal and tax implications of using either structure. The buyer will want to consider the legal effect and tax treatment of the structure to be used in acquiring the target business.
Assets: The assets of the target business makes the business attractive as this could be used to generate revenue. This comprises the tangible and intangible assets. You want to ascertain whether; the business has any assets which might be beneficial to you, are there any overriding third party interests? What is the value of the assets? It is also important to ascertain whether any assets are subject to any security registered against them or are subject to any finance or lease arrangements.
Trading performance: examining the financial information alone will not give you an overview of how well the business is doing. You need to analyse the trading performance of the business; to ascertain if the business will continue to do well in the future and that there is potential for growth. If there is upward movement in the value of the net worth of target Business or the net asset per share it shows that the value is improving. This will be a good business to acquire.
Distressed seller: In certain instances a seller might be under a lot pressure to dispose of the business and as result the seller may be prepared to reduce the asking price to sell it quickly.
Market Conditions: you need to look at state of the economy and ascertain whether the business continues to have a capability to earn income. Therefore, Buyers need to look at how the market conditions will affect the target business. We would recommend you conduct adequate research to spot trends in the market and for advice on how to anticipate the profitability of certain trades moving forward.
Debts: you need to conduct an analysis of the debts that are due such as any tax liabilities or supplier liabilities. This is particularly relevant in a share sale as a Buyer will ordinarily assume the liabilities of the business albeit these are normally accounted for within a completion accounts mechanism in the Share Purchase Agreement in such a way whereby the seller is ultimately responsible for any debts arising prior to completion.
Workforce: Employees or contractors, you may need them to continue to run the business. You need to ascertain who will be staying or leaving however, the TUPE Regulations impose strict rules on Buyers and Sellers alike as to whether employees are to stay or can be removed from a business in a transfer. You must therefore seek appropriate legal advice to ensure you do not breach the regulations as doing so could result in litigation. How will this affect the business? Do any of the employees require upskilling? Also are any senior employees required for continuation of the business? Certain businesses, such as those governed by OFSTED or the Care Quality Commission require certain managers, with certain qualifications, for the business to run. It is therefore important that you seek legal advice when it comes to regulated businesses as it may not be easy for you to simply replace or remove existing employees as well as considering the influence TUPE regulations will have over your decision-making.
Government policies: what are government policies in relation to that industry; is the business compliant with the relevant policy? Will the transfer of the Target business to you breach any policies or statutes, for example GDPR? Will you be required to notify a regulator on acquisition of the business or prior to the acquisition? These are questions you need clarity on before any transfer takes place.
Tax – have all applicable taxes been paid up to date? Has there been any late payment or fine? You need to ascertain what the tax liability risk is. It is worth noting that HMRC is allowed to investigate as far back as 20 years or more if required.
Litigation – you need to be certain there is no outstanding litigation or potential litigation against the target business, otherwise you may bear the responsibility for the ligation and this could also affect the business. For instance, are there any disputes with customers, suppliers or employees.
There are many issues which you need to consider when buying a business and the above gives an outline of just some of the issues to consider.
You need a team of experts to help conduct a proper assessment of the Target business, this may include Lawyers, Accountants and Tax Advisors. The experts will conduct a due diligence exercise to ensure you are getting the information you need before you proceed with the acquisition. Once you have concluded your search you can ascertain the business’s strength and what makes it attractive. In other words, you will be able assess your exposure to potential risk and ascertain the value of the return on your investment. Our team at Ison Harrision can assist you in acquiring the right business and advise you on the pitfalls associated with any particular acquisition.