Buying or Selling Your Business: A Quick Review
There are many reasons for buying or selling your business. However the requirements for a successful sale or purchase are different. Two sets of advisers are generally required: your lawyers and your accountants, apart from consultants who maybe specialists in that particular trade the transaction is involved in.
Some of the questions that a seller should ask are these:
(a) Is selling the only way to raise cash for example? Have you explore other ways with your banks or finance companies?
(b) If I am selling, what exactly am I selling? Clients list, market entry, market position that my products command? These maybe some important questions that a buyer may ask and a seller needs to be clear on his selling proposition to a potential buyer.
Similarly some of the questions a potential buyer may ask are:
(a) What am I buying to be specific?
(b) Does it fits into my existing business or am I going into a new area?
(c) Is there a better way for me to achieve my aim apart from buying into the existing market or should I grow it organically?
The Role of:
Consultants or brokers essentially connect the right parties together and provide some business advisories in the process. They may also be specialists in that particular trade and therefore will give you some “insights” from that industry from their years of experience in the trade. They are likely to charge a consulting fee in terms of percentage from the size of the transaction and it differs widely from trade to trade.
It is almost impossible unless you are a very experienced businessman to conduct a sale or a purchase without engaging your lawyers. The main reason lawyers are engaged is to ensure that proper legal due diligence are carried out before you part with your money. Some of the questions the lawyer should look at include:
(a) Is the seller legally authorized to sell in the first place? Are there are impediments such as shareholders’ agreement put in place that may block the sale in any way?
(b) Are there regulatory requirements that you need to know before buying the business? For example, is the licence to conduct that particular business only given to the seller and you need to apply for the license before you engage in the trade?
(c) What are the documentations needed from the seller in the due diligence phase that you must examined carefully before even putting down the goodwill deposit?
Similarly the accountants are needed for the financial due diligence aspect of the transaction. Again unless you are a very experienced corporate finance professional, it is almost a necessity to engage the accountants to do the following:
(a) Is this a fair price to pay for the business?
(b) Are there taxes or fees to pay in addition to the price that I am offering that are mandated by regulators? (Note – some of these taxes can run into hundreds of thousands in addition to the sale price).
(c) Are the financial documents provided to support the sale price, market size, profitability and so forth as claimed by the seller and are they valid and reliable?
(d) Are there unpaid debts I need to take over once the business is sold?
It is not surprising that technology plays a large part in a business especially if some kind of intellectual properties are involved. For example, you may be buying a certain technology that plays an important role in the business and therefore the ownership of that very technology needs to be verified as claimed by the sellers. Alternatively do you really know how this technology works because the very business success maybe singularly depended on a deep understanding of the technology in the first place and do you have to or even able to retain those specialists in the company after you have bought the company? Are they restrained from working for your competitors or set up their own shop to compete with you?
In short, buying a business or selling yours is not as simple as just getting the “right price”. A team of advisers with multiple skills are needed to ensure that you have either bought something of value and use or sold something at the very best possible price you should have obtained from a buyer. Trying to reduce cost by not engaging the necessary experts with relevant skills and experiences may actually hurt the buyer or the seller in the long run. It is precisely why the adage “penny wise but pound foolish” aptly described the situation for some buyers or sellers.
K. K. Lim is an Advocate and Solicitor in Singapore and his areas of interest and training include strategy, law and cybersecurity. He is a graduate of University of Texas at Austin, Monash Law School, and National University of Singapore Law Faculty and holds various technical qualifications. He is also an accredited mediator and an adjunct instructor in various universities. He can be reached at [email protected] or +65 94566191.
*This guide does not constitute any legal advice and should not be relied on as such. You should consult your professional adviser for your specific situation. Reproduction of this guide in any form is prohibited unless written permission has been obtained from the writer.