Buying a Business vs. starting up

First of all, buying a company is usually much better than just starting up from scratch. It’s easier, more predictable and can increase your chances of success, for the simple reason that there’s already an existing track record that you can draw insights from.

More than that, the time is right for buying businesses. The Baby-Boomer generation (people born between the early 1940s to 1960s) are reaching retirement age. After the 2nd World War, a lot of new owner-managed businesses have been established. In many of these cases, the owner’s children have chosen to pursue another path rather than managing their parents’ business, which is why at this time many of these owners are looking to sell.

There are a few types of businesses that are very sought after, due to these very qualities:

High Asset Value Businesses

A high asset value business will have a lot of value in terms of stock and equipment. You can generally purchase a bigger business with less money if you were to take a loan against the assets of the business. Think around 75% of the NET asset value. Also, if the business is not going as well as you would have hoped, this is usually a more secure investment due to the fact that you can sell the assets and get a big portion of your money back. We’re strong supporters of businesses in sectors like Manufacturing & Engineering and have helped many clients acquire these types of businesses in the past. Read more

This article deals with the possible pitfalls and issues that may arise from time to time during the due diligence process in business acquisitions.

Due diligence is a process whereby one party conducts checks on the other party. In the context of M&A this process takes place immediately after heads of terms are signed and a deal is agreed.

The main checks are done on the seller and the company or business acquired in order to satisfy the buyer, their advisors and lenders (if appropriate) that the business is as described.

The three main sorts of due diligence are commercial, legal and financial although there may be many other areas that require checking before a deal can be concluded and these areas normally arise from initial checks in the main three areas which are commercial, legal and financial.

Commercial due diligence

This is a set of checks around the commerciality and the commercial validity of the business going forward. The buyer usually needs to satisfy themselves that the business performance is not likely to decrease due to market conditions (example: political or legislation change) or due to any internal situation (example: employment termination).

Legal due diligence

This is a set of checks that is usually done by the lawyer representing the buyer.

This set of checks is meant to satisfy the lawyer acting for the buyer that the business is not experiencing any litigation or legal challenges. The lawyer usually reviews the contracts with customers suppliers and employees to uncover any potential or immediate risks to the smooth operation of the business. Issues that arise from a legal view point can be mitigated by putting additional paperwork in place to minimise the risk involved in the findings. Read more