Tips on Business Takeover
Business takeover is a complex exercise and should involve extensive checks and due diligence to ensure that you are taking over a sound business with great potential. Most of the time business buyers takeover a company which has great synergy for growth and neglect the operation and financial aspect of the business. They may even be blinded by the risk of future liabilities and lawsuits. Most business takeover in Singapore involves private company with no audit requirement and this puts the business buyers at greater risk because the target company's numbers have not be scrutinized.
This brings us to the next few paragraphs where we discuss the items to watch out for when you are buying a business which has put up for sale.
"There are many factors to consider when you are taking over a business"
Get an independent accountant to perform the financial check. There is a tendency for businesses to inflate sales and reduce or postponed expenses. Check for inconsistent grow in sales and reduction in expenses. Check for sustainability of income (i.e. recurring clients) and capital expenditure. Are they investing in the company for future grow? If there is substantial inventory, are they still saleable? Does the company have strong cash balance? Is the company owing others substantially? How much debts is there? Scrutinize the debtors' aging to see if the debts are collectible? Is there sudden spike in profit in last 3 years? If yes, you need to ask more questions on the spike in profit. If the profits is constantly reducing, it is also a concern if it will continue to drop. If you have the budget, it will be good to get two qualified accountants to provide you with the independent reports and see where are the areas of concern.
Valuation of Intellectual Property
For intellectual property, the valuation is subjective. If the company capitalize the intellectual property in its financial statements, you may wish to ask if it is over-valued. How much revenue is directly in connection with the intellectual property? You may also wish to get a lawyer specializing in intellectual property to scrutinize the filing and protection obtained by the company. How strong is the intellectual property protection? If someone comes out with something similar, can the company successfully sue for infringement?
Staff and Managers
Is there any dispute with the staff and managers. Has the company paid the bonuses and salaries of the staff. Is there any loan extended to the staff and managers? What are the staff benefits? Who are the good performers and the bad performers? You may wish to take this opportunity to align the staff benefits as well as retain the high performing staff and retrench the poor performing staff.
Staff benefits include monetary and non-monetary benefits. You should consider the number of paid leave, medical incentives, etc. Most importantly, you should check if any staff and managers are entitled to shares or stock options of the company.
Important areas you need to take note when taking over a business
You must ensure that you perform an audit on the tax matters of the company. You do not want to end up taking over a company with risk of tax evasion or under-reporting of income. You do not want to end up paying all the past years' taxes and penalties after taking over the company.
For Goods and Services Tax or GST, if the target company is a GST registered business in Singapore, you should check whether the transfer of assets qualify for GST exemption? Furthermore, if the business owns a commercial property, protentially you will have to pay the GST on the sale of the commercial property at a later date.
Related Party Transactions is another area where most business buyer overlooked. Some companies buy cheaply from related parties to show high profit for sale of business. Such related parties transactions not only distort the actual profit of the target company, it also create a potential issue with the tax authority.
Knowing what insurance coverage you have is important. This will indirectly tell you whether the owner take steps to minimize the company's risk exposure. For high risk business, having Directors' & Officers' or D&O insurance, general liability insurance and other types of insurance in place is important.
Infringing Governmental Regulations
If the target company is in a highly regulated industry, there is a potential risk of breaking the regulations. You will need to ensure that the necessary licences are renewed, filings are done and the company fully comply with the regulations. Checking their records on past infringements is also important.
How do the current computer and IT systems operate and how are they going to integrate with the buyer's existing system? The buyer must ensure that there is seamless transition to the new owner without losing critical and valuable data. Can there be cost savings from the integration of servers and IT equipment?
In conclusion, it is essential to plan and study the target company which you are going to acquire, consider all aspects of the business and assess its short term and long term potential before you decide whether to acquire or not.
We provide business sale and purchase services (i.e. business brokerage service). We bring business owners who are willing to sell their business to meet potential buyers who are willing to buy over the business. Our goal is to ensure that the sale of business is successful.