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same customers. A seller should find
out why the buyer is interested in the
business, and his future plans for it
(i.e., how it will be integrated into
the buyer's life/business activities).
What price range is the buyer willing
to pay? Does the buyer have the
financial ability to complete the deal?
Buyers: Investigation is Key:
Evaluate, Evaluate, Evaluate
Buyers interested in acquiring a business
will need to do their homework. This not
only means completing due diligence
on the potential acquisition, but also re-
searching other businesses on the market
versus the kind of business they are look-
ing for, what financing will be required
to complete a sale, and an analysis of
how the business will integrate with the
buyer's other assets.
For each available option, a buyer's
team of advisors can assist with evaluat-
ing the advantages and disadvantages.
Buyer's Investigation List
Here is a list of issues to consider when
contemplating the purchase of a business:
·
What are you buying? Assets or
shares? To take advantage of capital
gains treatment and exemptions, if
available, a seller will usually want to
sell the shares of the business. If buy-
ing shares, buyers need to understand
that they are assuming the liabilities
of the business, including existing
contracts and employees as well as
the corporate history. To minimize
the risk, buyers will need to focus on
actual or potential liabilities as part
of the due diligence. If buying assets,
buyers need to determine which
assets they need to run the business
successfully.
·
Who is the buyer? A buyer needs to
determine the best way to structure
the purchase. Should this business
be merged with an existing business?
Will it be a subsidiary of an existing
company or a completely separate
entity? Consultation with its team
of advisors will help answer this
question.
·
Financing: A buyer must consider
how he intends to finance the pur-
chase. Is he purchasing it alone or
with other investors? If the buyer
intends to obtain traditional bank
financing, he should discuss this
aspect with his financial advisors well
in advance. A buyer will also need
to determine how he will finance the
operations of the business. Will he be
funding the operations directly or will
he require access to an operating line
of credit?
·
Promise of exclusivity: A buyer's
due diligence is one of the most
important steps in the acquisition
process. Completing due diligence
on a prospective company, takes
time and money. To protect this
investment, a buyer should ask the
seller for a promise that the seller will
deal exclusively with the buyer for a
certain period of time. This needs to
be agreed at the outset.
·
Due diligence: Buying a business
involves risk. The goal of a buyer's
due diligence is to determine the
extent of the risks involved and to
decide whether to accept those risks
and proceed with the purchase.
Certain risks can be minimized by the
seller's representations and warranties
in the Agreement of Purchase and
Sale. A buyer's team of advisors can
help him understand and, where
possible, minimize the risks involved.
·
Employees: A change of ownership
can cause the seller's employees
unease and uncertainty. After the
acquisition, key employees may be a
necessary and valuable resource for
the buyer. It is important for buyers
to put a plan in place to deal with this
transition and to be aware that the
relationship between the buyer and
the seller's employees may or may not
be successful.
The buyer may not want to employ
some or all of the seller's employees.
If this is the case, this will need to be
negotiated with the seller. Employee
terminations can be costly, espe-
cially for long term employees, and
the seller will want the buyer to be
responsible for these costs.
·
Non-competition and non-solicitation:
Buyers should discuss the future
plans of the seller to ensure that the
seller and its principals are restricted
from competing with the business or
soliciting employees or customers
of the business after the sale. These
restrictions can be included in the
Agreement of Purchase and Sale.
Be Prepared to Walk Away
If a buyer's due diligence reveals serious
problems with the target business or risks
that the buyer is unwilling to assume,
or if the seller is less than trustworthy, a
buyer should be prepared to walk away
from the deal. Because due diligence can
be a lengthy and expensive process, it
can be tempting to push forward because
of the time and money already spent.
Keep a clear head. Consult with your
advisors and if you don't feel comfortable
proceeding, don't move forward.
The key to a successful purchase or
sale is to start the planning process early,
even if there are no current plans in place
for either. Regular maintenance of com-
pany records and operations can ensure
the business is in a strong position for
whatever future plans are implemented.
Both parties should invest in a trusted
advisory team to work with them through
the process, to a successful completion
of the deal.
1 Please note that while much of this discussion can
apply to any business purchase or sale, this article's
content pertains to buying and selling a business in
Ontario, Canada.