How to Buy Over a Business in Singapore
Why Buy Over an Existing Business Instead of Starting a New One?
Does the idea of being your own boss excite you? If an interesting business idea has caught your eye, you may want to consider buying over an existing business.
The upside of this is that you will acquire existing goodwill in the form of a customer base, marketing advantage and resources (employees, infrastructure) for a start. The operating costs of an existing business will also likely be lower than the startup costs for a new one.
This makes buying over an existing business usually less risky as compared to building up a completely unknown business from scratch.
What to Look Out For When Deciding Whether to Buy a Particular Business
When you have identified a particular business that you are interested in buying, the most important process before committing to the decision is due diligence.
The due diligence process is a comprehensive appraisal of a business which you might wish to acquire. This process usually establishes the target company’s assets and liabilities as well as evaluates its commercial prospects.
A checklist of things to look out for in due diligence would include:
1. Compliance and good standing
First, it is important to talk to other businesses within the same industry to understand the standing of the business you intend to buy. You may find out more about the reputation and potential problems of the target business you want to buy from any official sources.
2. Financial due diligence
Second, you should request for full financial disclosure from the business so that you can understand its current cash flow position. This will help you make an effective business valuation.
You may need an accountant and a lawyer to assist in this process.
3. Assets & liabilities (including intellectual property)
Third, the eventual valuation will require a good understanding of the assets and liabilities of the target company. Certain assets such as intellectual property is important to understand.
For instance, certain concerns might be whether the company owns the trade mark and trade name they are operating under or if the business has any particular innovation that should be patented.
4. Important contracts (including employment contracts)
Fourth, try to get a clear idea of the current strategies that the business has undertaken in order to understand how the business has succeeded in the past.
This would include whether there are key employees that the business relies upon (which you might wish to retain) as well as the material contracts with suppliers that the business requires in order to carry on its business.
Another important contract would be a lease contract where you should ensure that the landlord is willing to assign the lease to you.
5. Licences and permits
Lastly, find out more about the regulatory system that the business operates under. This may shed light on what questions to ask the seller which may possibly prevent you from buying over potential liability for a breach of regulations.
You will need to check whether there has been compliance with the relevant regulations as well as whether the business has all the necessary licences and permits.
For instance, if the business sells nutritional supplements, you will have to ensure that all necessary licences or permits have been obtained from the Singapore Food Agency.
What is the Process of Buying Over the Business?
Enter into negotiations
The process starts with entering into negotiations with the owner of the business. Negotiations extend beyond simply the purchase price, to many other details.
This includes whether the purchase will take the form of an asset acquisition or an equity acquisition, the employment of existing staff and the conditions upon which must occur before the sale is complete.
An asset takeover would mean buying over the selected assets of the company necessary for the company to operate. On the other hand, an equity acquisition would be taking over a majority shareholding in the target company.
At this stage, you can prepare a legal document known as a “Letter of Intent” or a “Term Sheet” to record the material aspects agreed upon as a basis for further agreement.
You could also include a term to ensure that the negotiations are exclusive which means that both parties should not be concurrently negotiating with another party.
Draft a sales and purchase agreement
Next, you should engage a lawyer to draft a Sales and Purchase agreement taking into account all the due diligence issues that have been identified.
This will often involve more negotiations over the exact terms of the sales and purchase agreement. Often, you would attempt to seek indemnities or warranties for those issues.
An example of this would be a warranty by the seller that the financial records of the business are true and complete. Another area of discussion would relate to transition issues such as in-progress work, current employees and even contracts with vendors.
Notify the Accounting and Corporate Regulatory Authority (ACRA)
Following the completion of the sale, you will have to notify the Accounting and Corporate Regulatory Authority (ACRA) within 14 days for any changes to the business’ name, registered address and appointment of company officers or auditors.
Additionally, you will have to update ACRA for any changes in shareholding.
No fees apply for notifying ACRA of the transfer of business.
What Should be Done After Buying Over the Business?
After buying the business, there are a number of things you need to do.
Remember to check through all the financial accounts thoroughly for any discrepancies that was not discovered during the due diligence process. If any discrepancies are discovered, resolve them as soon as possible.
This will help protect yourself from incurring any liability if the Inland Revenue Authority of Singapore (IRAS) requests for an audit.
Next, ensure a smooth transition by giving notice of the change in management to all employees, contractors, vendors and customers. You will need to give some thought as to how to assure them that the business will run smoothly despite the change.
Last but not least, chart a new vision on how to bring the business forward to greater heights.