Confidential information, pre business purchase: how to obtain information required to asses whether to buy a business |
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| Introduction |
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| This article explains the information you should seek about any business you may make an offer to purchase on. It is useful both for potential buyers and vendors too (so that they can see the view of the purchaser). |
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| So you’ve found what seems like an ideal business to purchase as your new venture? This is where the ground work is required. Does your research now, before you make an offer, to safe guard your interests. |
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| What information should be sought? |
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| If you are interested, the seller will usually ask you to sign a confidentiality undertaking or non-disclosure agreement before you can access sensitive or detailed information. This ensures them that you shall not leak out the key ingredients to their business to potential competition. |
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| They will usually also ask for details about you (via a CV) and evidence of your ability to fund a purchase. |
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| After an offer is made, but before a contract is signed, you’ll also need to look in detail at the business’s finances, employees, outstanding litigation, major contracts, IT and other technology. |
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| Assess a company's assets |
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| Presuming you are interested in only the business, and not the company, find out exactly what is for sale, or decide which parts of the business you are interested in buying. |
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| You may agree to purchase the whole business or just its assets, i.e. its equipment, stock and order book. If you only wish to buy the assets, 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. |
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| Whether you want to make an offer for the whole business or just its assets, there are several important things to check, including: |
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- Does the business have full legal ownership of all key assets such as plant, equipment and property? Ask to see documentation that proves all equipment and stock you are purchasing has been fully paid for and is not purely leased by the business - for example, check computer software licenses;
- Are warranties and guarantees for major pieces of equipment (such as computers, photocopiers, and vehicles) included in the deal?
- Is their intellectual property is protected and registered?
- Are there any continuing supplier and customer contracts involved in the sale? If so, do you understand what the contracts between the business and the other party involve? Are you prepared to take them on? Make sure you understand what these legally require from the business;
- Are employees involved? Make sure you are aware of terms and conditions of all employees and of the businesses key staff in particular. Find out if there have been any (or are any outstanding) HR issues, such as employment tribunals;
- Any trade specific matters?
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| Then need to decide how much these assets are worth. (Although to value the business as a whole you will also need to look at documentation such as its profit and loss account). |
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| Legal and financial document checks |
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| A confidentiality agreement is likely to be the first agreement you sign. Once agreed, you are likely to be able to access almost all of the key information. The seller will want to protect certain aspects of the business, so some information may be off limits until close to completion - despite your signing of a confidentiality agreement. Check: |
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- The company formation documents (you can get the company formation documents from Companies House), to check that the vendor has the legal right to sell the business (is there just him or are there more decision-maker involved?
- The original business plan will outline issues such as start-up finance which may notify you of any outstanding loans, for example;
- The business' profit and loss accounts which will tell you about the business’s financial commitments;
- 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 rental agreement and speak to the landlord if you want to run the business from its current premises;
- Check 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.
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| You should also ask for information and documentation regarding the business' current employees, IT and other technology and issues relating to the environment. |
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| Employment checks |
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| 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 (TUPE). |
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| 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: |
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- Ask to see copies of employee contracts. However, 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.
- This may include company cars, health insurance, gym membership, travel loans etc.
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| 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. |
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| IT and other technology |
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| 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: |
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- What is the value of the IT equipment and other technology?
- Are they under guarantee?
- What is included? Does it all belong to the business?
- Are there ongoing IT maintenance and service agreements/contracts essential to the business?
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| The environment |
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| 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. |
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| Operating within the law |
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| Much of the information you'll want to know about a business you are hoping to buy will be confidential, while some will be publicly available. |
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| Information such as employee and customer records, for example, will be protected under the Data Protection Act, while other details will just be commercially sensitive. |
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| If a vendor is keen to sell then they should co-operate fully and give you all of the information you need to arrive at an offer. This may include looking at bank loan details, property rental contracts and intellectual property licences, for example. |
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| Confidentially / non disclose agreement |
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| It is likely you will be asked to sign a confidentiality agreement (also known as a non-disclosure agreement). This agreement protects the existing business owner and prevents you from using any information you have learned about the way the business is run, should negotiations breakdown. |
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| You can find a template non disclosure agreement, drawn specifically for business sales, linked right. The TUPE documents you shall need are there too. |
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| If the vendor already has a confidentiality agreement ready to be signed by you, read it carefully to ensure it does not contain unreasonable 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. |
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| Of course we can check and edit any legal agreement too. Contact us for a quote. |
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