3 Questions to Ask Before Buying a Company

August 23, 2016

So you are in a position to buy a company. What a great opportunity, but as with any type of new business venture, not one without risks. Here are 3 vital questions to ask yourself before you take the plunge! As you will see what is important is research and due diligence. Basically, you need to ask a lot of questions before you sign on the dotted line!

1. What is the True Value of the company?

Find yourself an accountant who specializes in valuing a business. Is it a fair asking price and are you getting the true value? How did the seller arrive at the purchase price and is it backed up by the financials of the business? Whether property based or asset based check everything from cash flow and earnings to intellectual property and good will. Take a look at the history of the business and its current performance, sales, turnover and profit. Is there an existing business plan in place? Why is the business being sold and what is its latest financial position (cash flow, debts, expenses and assets). Is the company involved in any litigation and are there any regulatory changes that may affect it in the near future?

2. Carry out your Due Diligence. ASK, ASK, ASK!

The message here is ASK, ASK, ASK! Find yourself a solicitor to carry out commercial due diligence or disclosure exercise. Ask yourself…is everything as it should be? At the end of the day, you are buying an income stream for your future. As a buyer, you will usually be unable to gain a full knowledge and understanding of the Company’s affairs and business before committing to buy so there is a legal process in place!  Ultimately this will produce what is called a “Disclosure Letter” so you can be sure of all material aspects of the company. The disclosure letter will collect all the information you need from business contracts to payroll numbers, employment contracts to tax records. Make sure you are 100% sure of the company you are buying. The disclosure letter will record all significant documents and they will be attached to the letter for a full history and bible on how the company works! What are all the existing obligations and what are you getting yourself into? Are you inheriting significant accounts receivables? Is there a long-standing lease agreement in place? Are there immediate contract obligations to fulfil? Are there any outstanding loans the business is guarantor of attached to any of the assets?

3. Is the Tax Man Happy?

The disclosure letter comes hand in hand with a tax indemnity. Make sure you don’t take the wrath of HMRC for tax liabilities falling before you bought the company! Are the last audited accounts up to date. Is the VAT in order? Think about Capital Gains Tax and Corporation Tax. Obtain actual lodged tax returns. Tick this box for peace of mind.

 

Always consult with an experienced lawyer throughout the process.

Hannah Newell – LawBite LawBrief. For further legal advice, you can contact Hannah via our online legal advice portal.

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