Introduction
This article explains about what information you should seek about any business you are interested in buying.
So you’ve found what seems like an ideal business to purchase as your new venture? You'll need to do a lot of ground work beforehand to make sure it is as good as it seems and that there are no skeletons that later could fall out of the closet.
After an expression of interest is made, but before a contract is signed, you’ll need to look in detail at the business’s finances, employees, outstanding litigation, major contracts, IT and other technology in order to value the company.
The research stage is usually known as due-dilligence.
Agreeing to confidentiality
When you approach an interested seller with an offer to buy his business, he will usually ask you to sign a confidentiality agreement (also commonly called a non-disclosure agreement) before you can access sensitive or detailed information.
That doesn't guarantee that you keep the information safe, but does provide him with a means of recourse if you do leak out the key secrets of his business to potential competition.
In return, a seller will usually also ask for details about you and evidence of your ability to fund a purchase. Likewise, the confidentiality agreement can prevent the seller from broadcasting information he learns about you.
If the vendor already has a confidentiality agreement ready to be signed by you, read it carefully to ensure it does not contain unreasonable restrictive clauses that put you in jeopardy. For example, you may already be looking at developing a product similar to one offered by the business. The confidentiality agreement may prevent you doing this if the deal falls through.
Assessing assets (and liabilities)
The seller may be selling the company (i.e. all the shares of the company), the business, or part of the business (such as a particular division).
You need to assess what is for sale, and what you are interested in. Particularly if you are buying part of the business, you may find other interconnected parts that are not part of the offer that would make the purchase much more profitable for you. In other words, you need to identify what is on the table, but also what is not on the table that could affect how good the deal is.
If you only wish to buy part of the business, you will need to determine whether the seller will sell them with or without compensation due to loss of tax benefits, for example from a share sale, and whether the assets are associated with liabilities (such as loans secured against equipment).
There are several important things to check, including:
Does the business have full legal ownership of all key assets, including plant, equipment and property?
Ask to see documentation that proves that all the equipment and stock you are purchasing has been fully paid for and is not simply leased by the business. Additionally, check that computer software licenses exist, particularly for specialist applications.
Are warranties and guarantees for major pieces of equipment (such as computers, photocopiers, and vehicles) included in the deal? We explain how to use them in this article.
Is their intellectual property is protected and registered?
Are there any continuing supplier and customer contracts involved in the sale?
If so, make sure you understand what the contracts between the business and the other party involve and that you are prepared to take them on. Make sure you understand what these legally require from the business.
Does the business include the transfer of any employees?
Make sure you are aware of terms and conditions of all employees, and of the businesses key staff in particular. You can do this by reviewing employment contracts. You should find out if there have been (or if there are any outstanding) HR issues, such as employment tribunals.
Any trade specific matters?
These might include problems with suppliers delivering goods on-time, the quality of work of an outsourced service provider, or failure of a key customer to pay on-time or in full.
Then need to decide how much these assets are worth.
To value the business as a whole you will also need to look at documentation such as its profit and loss account.
Legal and financial document checks
You should check:
that the vendor has the legal right to sell the business and the ability to do so (i.e. he owns it outright and there are no more owners or decision makers who could veto his decision). If you are buying a company or the business from a company, you can do this by looking at the registers lodged at Companies House.
the original business plan (if there is one) will outline issues such as start-up finance which may notify you of any outstanding loans
documents detailing outstanding loans and debts
that the business has legal ownership of its key assets and what the terms are. Ask your solicitor to check the property deeds for premises owned by the business, for example, or ask for the lease and speak to the landlord if you want to run the business from its current premises.
with the Registry Trust for any court cases or late-payment actions being taken against or by the business that could affect its finances or reputation.
You should also ask for information and documentation regarding the business' current employees, IT and other technology and issues relating to the environment.
Employment checks
Consider existing employees carefully. Normally a new business owner has to continue to employ the existing staff on their current terms and conditions under rules known as the Transfer of Undertakings (Protection of Employment) Regulations (or TUPE). An explanation can be found here.
Your main concern when assessing a business is how much the current terms and conditions are going to cost on an annual or monthly basis. To do this you should:
Ask to see copies of employee contracts. You need to remember that these may differ for different levels of employee.
Look at the monthly wage bill, National Insurance contributions, pension contributions and any other benefits.
Look at the costs of other benefits. These may include company cars, health insurance, gym membership and travel loans.
Remember any documents you see are highly confidential. Many of the business' employees may not know the business is up for sale. Once you have bought a business you need to comply with TUPE and other employment laws.
IT and other technology
A business' IT system is often vital to its smooth running. You will therefore want to consider how old any systems and equipment are and whether it is being sold as part of the deal. You will need to ask questions such as:
what is the value of the IT equipment and other technology?
are they under guarantee?
what is included and does it all belong to the business?
are there ongoing IT maintenance and service agreements essential to the business?
The environment
Another consideration will be the business' effect on the environment. Depending on the business sector it may have to pay environmental taxes and have other obligations in this area.
If you think the business may be affected, speak to the Environment Agency.
Summary
Carrying out due dilligence is a process of identifying business risks and assessing the cost of putting right any problems. Warranties can be very helpful in limiting risk where it cannot easily be assessed.
We recommend that you spend time getting know a business in detail before offering to buy it.