Buying an existing business in Singapore is not a straightforward matter. There are a number of things that one ought to consider.
Stage 1: Due Diligence
After identifying a business to buy, it is critical what is actually on sale before you hand over your hard-earned money. You need to check that the business is what the seller makes it out to be before confirming the purchase. What you discover from this checking process will not only help you negotiate the price of the business and the terms of the agreement between you and the seller, but it will help you determine your willingness to commit to any potential legal risks.
This checking process otherwise referred to as due diligence, entails you asking the seller questions and requesting that he/she provides you with documents detailing the business’ affairs. These are affairs separately relating to law, finance and business. Do note that this article focuses on legal checks, but finance and business checks are just as important.
Before you embark on the checking process, do also note that it will be good for you and the seller to sign a letter stating both party’s intentions. This letter can state that the seller cannot enter into negotiations with other parties while you conduct checks on the business. While this letter is not legally binding in and of itself, it could help provide clarification if a dispute arises later.
The following is a list of legal questions that you can ask the seller. Do note that they are not exhaustive.
Questions to ask:
1. Who is the seller?
When buying most things, we don’t usually think about whether the seller has the authority to sell to you. When buying a business, however, you cannot simply assume that the seller can sell to you. If the seller is a corporation, you must determine that all the shareholders have approved of the sale or if the seller is an individual, you must determine that there are no legal restrictions on him/her to sell. It is thus also good at this point to determine the corporate structure of the business.
2. What does the business actually own?
It is practical to identify the assets of the business as this will help you fairly evaluate the business and understand where potential legal disputes over ownership of assets could arise. The following are certain assets that you might want to pay particular attention to:
a) Business Assets
This refers to assets of the business that are important for the business to function and to function well. It could include machinery, transport vehicles, etc. You should check that the seller owns these physical assets, that they are insured and that they are in good working condition.
If the business needs a physical space to run, it is also important to check any lease agreements detailing the ownership of the real property.
Another important business asset that should not be overlooked is intellectual property. This essentially refers to anything that has been created by an individual which gives that individual rights over the creation. You will want to find out if you are buying over that individual’s rights or if you will have to act subject to that individual’s rights.
b) Material contracts
This would include any document detailing the company’s internal affairs (like shareholders’ agreements, joint venture agreements, employment contracts) as well as the company’s external affairs with clients. It is important to understand these contracts as you can carry out the necessary obligations under these contracts to avoid getting sued by the relevant parties. It is also good to know which contracts are important for the business to maintain in order to run well.
c) Intellectual property
A big part of what is valuable to a business is often intangible. Things such as brand names, trademarks, client lists, pricing, supplier lists, are often worth more than the physical assets of the company. These assets can also be duplicated easily, diminishing their value. It is important to ensure that these are accounted for, and transferred along with the rest of the business.
Has the business complied with the requirements of the law?
It is crucial to ensure that the business you buy over is compliant with laws set out by statutes or governmental authorities. If you buy over a business that is incompliant, you could incur more costs in the form of fines. Further, it will be challenging for you as a new owner to fix past wrongdoings of the previous owners as you will not have a clear idea of what had happened before you took over the business. You should thus look to see if the following exist and are up to date:
This would include all necessary licences, permits and any other arrangement with authorities giving the business approval to do certain things. For instance, if you are buying over a pub, you should check to see that the business has a licence for live music to be played till late in the night.
If the company you purchase is registered for GST, you will have to reapply for GST when you take over since the business now has new ownership. You will also have to take note of filing personal income tax returns, separate from the taxation on the business, to avoid getting into trouble with the Inland Revenue Authority of Singapore (IRAS).
It is also good to note that you should check through all financial accounts thoroughly for any discrepancies and resolve them as soon as possible.
c) Reports and audits
It is helpful to know if the business you buy over must be assessed by government bodies on health and safety standards and/or is subject to environmental obligations. If it is, it will be good to obtain copies of all relevant reports.
4. Are there any existing or threatened legal proceedings against the business?
If there is no compliance with the law as highlighted in 3. or if there has been a breach of any of the material contracts in 2., the business could suffer. It is useful to then make sure that you are not taking on an already-suffering business. You should find out if there are any ongoing or threatened legal proceedings against the business which the seller might not have told you about.
After acquiring all the necessary information, you can better assess if you want to buy over the business and if you do decide to go through with the purchase, you will be better equipped to negotiate with the seller for the terms that should be included in the agreement.
Stage 2: Finalising the Purchase
After negotiations end, it is time to put in writing the agreed upon terms in a document. This written agreement should clearly reflect, among other things, the ownership of various business assets and exactly how complaint the business is with the law. This agreement will also be an opportunity for you to include terms that will insulate you from any losses suffered upon buying over the business. The only way you can protect yourself this way is if you are made aware of any potential issues through the due diligence exercise conducted at Stage 2.
After this agreement has been signed and the purchase has been finalized, you should notify the Accounting and Corporate Regulatory Authority (ACRA) within 14 days of any changes to the business’ name, registered address, the appointment of company officers and any changes in shareholding. No fees will apply for notifying ACRA of the transfer of business.
If you have chosen to retain employees under the previous management, you will also have to provide new employment contracts for them to sign and these will be effective from the date of the new ownership.
Considering buying over a company?
If you are considering to purchase an existing company in Singapore and would like legal support in this process, please don’t hesitate to get in touch for a no-obligation discussion.