BUYING a business should involve a good deal of detective work before you make an offer.
BUYING a business should involve a good deal of detective work before you make an offer. It takes time and considerable effort to complete the groundwork, but detailed initial inquiries are essential to ensure you have a fair idea of what you would be taking on – and whether you want to.
First check that the company has full legal ownership of all plant, equipment and property, and that warranties and guarantees are current for major equipment. If there is intellectual property connected with the company, check through your advisers that it is protected.
Taking on staff from an established business means you have to investigate thoroughly contracts, terms and conditions. It’s also worth looking back to see if there have been any employment tribunals or other staff problems. Companies House will give instant access to documents such as the annual return and accounts. Ask the business owner for other documents, such as the company formation documents, the first business plan and financial commitments.
Although it is likely you will have to sign a confidentiality agreement, sight of the documents will clarify if there are any other decision-makers in the business which could affect the legal right to sell the company. They will also set out any outstanding loans and any losses.
If you are buying a services business, rigorously test the quality of those services before buying. Rate the reality of hotels, pubs or shops against the offer by visiting them repeatedly and ensure the standards are acceptable to you before going forward. Property deeds and lease agreements all have to be examined in detail by your advisers.
If, after all this preliminary investigation, you are happy to proceed, you can put in your offer.
Once the offer has been accepted, your advisers will be able to carry out a formal due diligence exercise, looking in detail at the finances, contracts, IT, employees and any outstanding problems or litigation connected with the business.
The time and effort you put into identifying strengths and weaknesses of the target business will underpin its long-term success if you decide to buy. It could also alert you to concerns that mean the business is not right for you, and so avert an expensive mistake.
Gillian Hall is head of corporate law at Watson Burton LLP.