The purchase of a Business by buying a company carries both advantages and disadvantages. The advantages are that by way of purchasing outright the shareholding of a Company, the Purchaser “steps right into the shoes” of the Company’s Business. In other words, there is mostly no need to amend or alter the existing contracts enjoyed by the sale company by mere virtue of the purchase of the shareholding by a new party. In addition, if a company holds leases in desirable locations for offices or retail, then in most cases, the acquisitions of the shares of that company will not expose the company to any need for Landlord’s consent to make the sale. In some modern leases, for example, shopping centres, the Leases have contained a proviso for “change of control” clauses whereby the sale share could trigger an application of consent by a Landlord. These Leases are the exception rather than the rule, and a legal review will reveal if this is the case.
A proper mode of purchase of a limited liability company involves two strands of investigation. One is accounting due diligence, and the second is legal due diligence. Your Accountant will review and analyze the books of account of the Company that are agreed for transfer for proper investigation and will highlight any issues that arise from this investigation. Such issues may be under declaration of VAT, non-payment of the Universal Social Charge (historically PRSI) or miscalculation of liabilities for Corporate Tax. In addition, proper Accountant due diligence will confirm the tax liabilities facing the Company as against its cash flow in the current trading environment so that the future liabilities of the Company can be assessed as being against the purchase price. The second strand of work then involves the examination of legal, due diligence, which we carry out in the numerous transactions we have acted in the acquisition of the Companies.
The legal due diligence involves an investigation of the following:
- The legal interests of Leases/Title that the Company holds in its various retail/commercial units.
- The terms of Hire Purchaser Agreements and exposure to finance (this is done in partnership with the Accountancy due diligence process to complete a cost/risk analysis).
- Any issues with the form of contract used by the Company in its normal trading relations.
- The compliance by the Company in sale with the various codes of practice, rules, regulations and the applicable legislation to the industry in question.
- If Licensing is involved in the business, an investigation of matters in the Licensing Office as well as the due and proper enquiries from the Vendor Company of all matters that may affect the Licenses its holds.
- Investigation into its intellectual property rights, the form of Intellectual Property and checks in the appropriate registries that trademarks and patents are properly and duly registered. Where IP is not registered, we advise the Purchaser as to the risks, if any, in this respect. We seek confirmation that all intellectual property is, in fact, properly owned by the Company and not any other party and where not owned, arrangements should be put in place for the inclusion of these items in the sale.
- A review of the employment status of all employees with the Company, a report on their employment contacts, duration, rights acquired by the employee and options for redundancies if the business is to be reorganised after acquisition.
- A review of the operation of the Company’s Pension (if any) for the benefit of its employees to ensure that it is in compliance with the necessary regulations and legislation.
- A proper review of the IT infrastructure, the software operated and used under Licence by the target company and an analysis to ensure that all required domain names are available to the target company or are transferred as part of the transaction.
Legal and accounting due diligence may throw up a number of issues which then reflect on the true value of the target Company, and it is dangerous to consider purchasing any business without the conduct of a proper review.
We have been involved in countless cases where individuals agreed with the direct transfer of businesses without proper scrutiny and after which issues have come up after the fact, despite the assurances of the Vendor. In these cases, the Purchaser has been exposed to considerable unforeseen costs or loss with little recourse to pursue the Vendor as a result. The maxim of “buyer beware” is firmly enshrined in Irish Law, and this applies in the commercial context also.
To consider buying a business without being properly advised is to buy that business without a real sense of its value. You should also refer to our separate section on buying a business.
If you are considering buying a business, why not contact us today for a free consultation to discuss your proposal from the start. As always, our fees are reasonable and transparent, and we will discuss the fees with you at the outset.