The value of mergers and acquisitions (M&A) in Singapore rose to S$142 billion in 2015, almost double that in 2014. Many Singaporean businesses are also dealing in outbound acquisitions to broaden their interests overseas. However, buying a business is more than just a game of dollars and cents – there are many legal considerations and processes involved which are must-knows if you are looking to strengthen your hand at the negotiating table.
Identifying a target
There is a common Chinese saying in Singapore "to do the unknown, it would be better to do the familiar". A good place to look would be an industry that is familiar to you. Find a company that is suitable for your needs and have a potential for growth. One avenue to start looking would be the newspapers as some business owners advertise the sale of a business on the newspapers. Alternatively, you can also approach professional brokers or property agents to help source for available businesses and even negotiate with sellers on your behalf.
Plan your finances
It is important and prudent to consider the amount that is required as an initial investment and the subsequent instalment payments. Detailed planning will help ensure that sufficient funds are available at each stage. Consequences that may be suffered by a buyer as a result of having insufficient funds at each stage includes, without limitation, late payment interest, delays or a failure to complete the purchase, thereby resulting in a breach of contract.
Sign a letter of intent
Once you have decided to purchase a business and both the seller and buyer are ready to enter into negotiations, a letter of intent should be prepared to capture the intentions of the buyer and seller. It is worth noting that the letter of intent is in itself not a legally binding contract. Notwithstanding, the contents of the letter of intent may be useful in times of dispute over the agreed terms.
The letter of intent could be drafted to include exclusivity, which is a clause to prevent the seller from entering into negotiations with other parties within a specified time frame. In addition, it would be advisable to include a confidentiality clause. This non-disclosure clause would protect the seller from the misuse of its confidential information by a prospective buyer, which would be binding even upon completion of the purchase. The confidentiality clause should likewise be applicable to the seller so as to prevent him from taking away value from the business.
Due diligence exercise
It is important to ensure that you are buying a business that is legitimate. Therefore, you must take into account the liabilities that the company has.
Professionals such as accountants, tax advisers, valuers, and lawyers can help ensure that you are paying a fair amount for the business. For instance, the accountants could provide you with professional advice on the financial health of the company when they come across the figures in the company's accounts which a layman may not be able to comprehend. Having this information would be crucial in helping you ascertain the right price to pay for the business.
An example is the purchase of HSR International Realtors, where the business was bought over for a nominal sum of $1, considering the negative net asset value of the HSR Group at that point in time. Such information can only be acquired through careful analysis and the advice of professionals.
In the case of Columbia Asia Healthcare purchasing Gleni International Hospital proves instructive as well. The purchaser's due diligence exercise failed to uncover tax avoidance and unserviced debt obligations in the target's accounts. They inherited these liabilities unknowingly, and were forced to bring the matter to court to claim damages from the vendor.
Professionals could also ensure that the accounts are properly managed. This is important as inaccurate financial reporting would present the company a different light and result in bad decision making. Legal or corporate secretarial agents help ensure compliance with the Accounting and Corporate Regulatory Authority of Singapore ("ACRA"). In many cases, late filings with ACRA have resulted in a poor compliance rating of the company. In addition, late filings will incur a fine, which can be hefty depending on the length of delay.
Make it legally binding
Sam Goldwyn once said: "A verbal contract is not worth the paper it is written on." Buying a company can be a huge investment, and the last thing you want to do is to buy a company with all its obligations and liabilities on a gentleman handshake. Putting the terms down in an agreement would encourage the parties to take their promises seriously, thereby reinforcing the commitment to fulfil their respective obligations. It would ultimately also serve as a record of the entire agreement that assures that it would, if necessary, be enforceable in court.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
Do you know more about this story? Contact us anonymously through this link.