Investment in a business without careful planning and due consideration is a risky proposition. Please go through these tips. They will help you to make a considered decision.
First steps
Look inwards and around you at your existing activities. Examine and analyze objectively if what you propose to invest in is going to suit you and aligns with your capabilities. Consider factors such as markets, competition and profitability.
Research online. It will give you considerable insights into what customers expect and about existing competition.
Conduct due diligence regarding the seller Obtain complete details and get a professional to conduct a thorough background check. Please be particularly careful about financial documents. These can be cooked up and be at variance with facts on the ground.
Take it a step further and interview customers of that business to know their opinion and experience. Also check bankers, lenders and vendors.
Take a look at the competition and analyze how the business you propose to buy stands vis-à-vis those competitors, their products, market share and reputation.
New opportunities that the proposed purchase of the business represents should be considered in depth. Is there a chance to grow and what the future prospects are for the company and its products? If a technology is being phased out then it makes no sense to invest in that business.
Engage professionals like chartered engineer, chartered accountant and legal professionals to handle your investment proposal. They will contribute with their expertise.
Going into details
If the preliminary surveys give positive results, then it is time to get down to the nitty-gritty of things and go into specific details of all aspects. Examine the assets and get them actually valued instead of going by paper valuation by the seller. Check conformity with laws and regulations and check to see if there are any legal issues.
Check for outstanding debts and see if they are the same as those shown on paper. Talk with the creditors to see if such debts can be restructured to ease your financial burden.
Check for intellectual property rights applicable to the seller’s products and services and whether these logos, brand names and patents are secured.
Go into details into financials with the help of a chartered accountant. You should get a good idea about past financial activities and future prospects.
Give the premises of the business a thorough check. Also get a lawyer to examine deeds, lease or rental agreement or ownership documents and also pending property taxes, mortgages and claims.
Inventory of the seller must be checked and reviewed. Separate saleable items from those that have nothing but scrap value. Evaluate the investment needed.
Check about insurance on property, inventory and equipment to see that insurance is live and covers fully all assets and liabilities.
Check for taxes and dues payable to various authorities.
Check permits, licenses and contracts for validity and areas they cover. Are these licenses transferable?
Examine existing contracts to see if these are transferable otherwise customers of the company could very well terminate the contracts.
Check everything about employees and understand full implications of the business sale on the future of employees. Will you have to retain existing employees or is there a termination clause? Are all their dues paid? If not, what are the financial implications?
Look at existing customer list and analyze the list for one-off customers and regular customers and the quantum of sales involved.
Look for financing from institutions as well as other investors. If you are looking to get financing then you will have to provide a set of water-tight documents concerning the business you propose to acquire.
Finalizing the deal
We assume you have already retained a lawyer to be by your side from the start. Now is the time for your lawyer to step in to finalize the deal by drawing up the necessary legal sale deed documents incorporating all clauses that are relevant and pertinent to all of the above factors.
Refine the sale contract by checking it thoroughly to see that nothing is missing. Check the financial clauses for mode of payment, schedule of payment, warranties and other obligations.
Verify the non-competition clause and get it cleared. Ideally, the contract for sale should not have any obstructions limiting the directors from competing. Equally, it must be made clear that the sellers should not again re-engage in the same business with the same line of products that will pose a strong competition to the existing brand.
Review all approvals. It is necessary to make sure that the contract for sale deed meets regulatory requirements and will get approved and it is legally binding on all parties. It must also be made clear about sharing cost of documentation and registration fees or deciding who will bear it—the buyer or seller.
Due diligence at each stage of the finalization is something that cannot be overstressed. Finalize only after you are sure everything is clear and water-tight.
