14 June 2012
Buying a business – 7 deadly deal-breakers!
Corporate solicitor, Anne Scheland, highlights the seven deadly deal-breakers that can bring the purchase of a target business to a grinding halt.
Employees - If you buy a company as a going concern or via an asset purchase, you must take on the employees on their existing contract terms, so ensure that you clearly understand what this entails.
Key staff - Will you be able to tie in key staff or management on special terms?
Pensions - You may have to take over the target company’s existing pension arrangements, which you should ensure are fully funded, or offer prescribed pension arrangements to transferring employees.
Intellectual property rights - A brand or patent may be the most valuable asset of the target business. Your due diligence enquiries will need to check that the target business owns the rights, has them adequately protected and is free to transfer the rights to you.
Environmental issues - You could face huge liabilities, possibly including criminal liability, if you buy contaminated land or a company that caused or allowed contamination.
Shared assets - If you are buying a business that is part of a group, it may share assets such as computer systems, property and insurance policies with other group members. Consider whether these arrangements can be unravelled without incurring prohibitive costs or disruption to the business.
Consents and third party approvals - The transaction may require approval from your business’ shareholders or the target business’ shareholders.
You may need the approval of third parties, such as an industry regulator, or you may require approval from competition authorities. Consider when to approach them and whether you are likely to get their consent. If you are acquiring all the shares in the target business, check that no important contracts can be terminated on the change of control of the target company.
The purpose of due diligence is to investigate the assets and liabilities of the target business.
We recommend that we co-ordinate this process to ensure you get the legal protections that you and your business requires. If you become aware of any significant problems in the due diligence process, you can abort the deal, negotiate a price reduction or seek specific protections in the acquisition agreement.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.