In the current economic climate reeling from the effects of COVID-19, not all situations lead to doom and gloom. Where there’s a crisis, there’s an opportunity. Many companies may fold, and numerous companies are actively looking for suitable buyers. Those with a solid financial footing are more than willing to explore potential companies for acquisition. To ensure a sound purchase, it’s essential to follow a business due diligence checklist, which serves as a critical tool for potential buyers to evaluate these opportunities thoroughly.
If you are considering buying a business, we have prepared a convenient business due diligence checklist that outlines significant aspects to be examined. This due diligence checklist for buying a business is vital to arrive at the right decision on whether or not to buy the said business. Although the due diligence process checklist is usually undertaken by professional lawyers and accountants, it is beneficial for potential buyers to keep this checklist in mind.
Additionally, this article will discuss legal due diligence in detail for you to gain a better understanding of the role your lawyers play when planning to buy a business.
Even if you’re a business owner planning to sell your business soon, this article and its business due diligence checklist will provide valuable insights into what potential buyers will be examining.
The topics covered in this article are as follows:
- The Process of Buying a Business in Singapore
- What is Due Diligence?
- What is Due Diligence Used For?
- Business Due Diligence Checklist
- What is Legal Due Diligence?
- Why is Legal Due Diligence Important?
- The Legal Due Diligence Process
- What is Normally Covered in Legal Due Diligence?
The Process of Buying a Business in Singapore
The general outline of the process of buying a business in Singapore is as follows:
- Entering into a Non-Disclosure or Confidentiality Agreement
- Entering into a Memorandum of Understanding or Term Sheet to set out the key terms of the transaction
- Due Diligence is carried out
- Entering into a Sales and Purchase Agreement
- Completion of the transaction
Please take note that the timing of the due diligence may differ from transaction to transaction. Some companies prefer doing most of the due diligence only when terms of the investment or buyout have been agreed (but before completing the transaction by signing off on the Sales and Purchase Agreement).
What is Due Diligence?
Due diligence can be broadly defined as an investigative process that offers the potential buyer of a business the opportunity to obtain as much information as possible about the business. Equipped with this information, the potential buyer can weigh the risks and benefits of the acquisition, determine the suitable price, and outline what further steps need to be taken in terms of documentation, regulation, internal restructuring, and finances to finalize the deal.
Essentially, due diligence involves the examination and scrutiny of critical business documents to ensure that vital legal, financial, and business documents exist and that the contents of these documents are favorable to the buyer, and do not reveal any deal-breakers.
Although due diligence takes various forms, it typically revolves around legal due diligence, business due diligence, and financial due diligence.
In this article, we shall present a comprehensive general business due diligence checklist briefly for your ease of use or reference. Then, we shall delve into legal due diligence in further detail.
What is Due Diligence Used For?
Although the focus of this article is the purchase of a company (acquisition), do take note that due diligence is also used in mergers of companies and businesses, and the following:
- General risk management
- Major bank financing
- Preparing an audited financial statement or annual report
- A public or private financing transaction
- A joint venture
- An initial public offering (IPO)
Business Due Diligence Checklist
Please note that this checklist is a sample of the most common issues and considerations when buying (or looking to sell) a company in Singapore. We hope it will prove to be valuable in your business dealings.
I. Financial Information
A. Annual and quarterly financial information for the past three years
- Income statements, balance sheets, cash flows, and footnotes
- Planned versus actual results
- Management financial reports
- Breakdown of sales and gross profits by:
- Product/Service Type
- Accounts receivable aging schedule
B. Financial Projections
- Quarterly financial projections for the next three fiscal years
- Revenue by product type, customers, and channel
- Full income statements, balance sheets, cash
- Major growth drivers and prospects
- Predictability of business
- Risks attendant to foreign operations, if any (e.g., exchange rate fluctuation, government instability)
- Industry and company pricing policies
- Economic assumptions underlying projections
- Explanation of projected capital expenditures, depreciation, and working capital arrangements
C. Capital Structure
- Current shares outstanding
- List of all stockholders with shareholdings, options, warrants, or notes
- Schedule of all options, warrants, rights, and any other potentially dilutive securities with exercise
- prices and vesting provisions.
- Summary of all debt instruments/bank lines with key terms and conditions
- Off-balance sheet liabilities
D. Other financial information
- Summary of applicable tax positions
- General accounting policies
- Schedule of financing history for equity, warrants, and debt
A. Each product or service
- Major customers and applications
- Historical and projected growth rates
- Market share
- Speed and nature of technological change
- New products/services, product enhancements
- Cost structure and profitability
III. Customer Information
A. List of top customers for past fiscal years and current year-to-date by application
B. List of strategic relationships
C. Revenue by customer
D. Brief description of any significant relationships severed within the last two years.
E. List of top suppliers for the past fiscal years and current year-to-date
A. Description of the competitive landscape within each market segment including:
- Market position and related strengths and weaknesses
- Basis of competition (e.g., price, service, technology, distribution)
V. Marketing, Sales, and Distribution
A. Strategy and implementation
- Discussion of domestic and international distribution channels
- Positioning of the Company and its products/services
- Marketing opportunities/marketing risks
- Description of marketing programs and examples of recent marketing/product/public
- relations/media information on the Company
B. Major Customers
- Status and trends of relationships
- Prospects for future growth and development
- Pipeline analysis
C. Principal avenues for generating new business
D. Sales force productivity model
- Quotas, incentives, targets
- Sales Cycle
- Plan for New Hires
E. Ability to implement marketing plan with current and projected budgets
VI. Research and Development
A. Description of R&D organization
- Key Personnel
- 3 Major Activities
B. New Product Pipeline
- Status and Timing
- Cost of Development
- Critical Technology Necessary for Implementation
VII. Management and Personnel
A. Organization Chart
B. Historical and projected headcount by function and location
C. Summary biographies of senior management
D. Compensation arrangements
E. Discussion of incentive stock plans
F. Significant employee relations problems, past or present
G. Personnel Turnover
VIII. Legal and Related Matters (This will be discussed in detail below)
B. Intellectual Property
D. Regulatory Matters
E. Insurance Coverage
F. Corporate Documents
G. Business Agreements
H. Share Issuance
IX. Other Matters
A. Information Technology (IT)
C. Outsourced/Independent Professionals
D. Environmental Issues
E. Real Estate
Let us now discuss legal due diligence in more detail.
What is Legal Due Diligence?
Legal due diligence is the process of obtaining information about the business to ensure the purchase is beneficial. This process aims to unveil all vital facts and potential liabilities. After analyzing the collected facts, an informed decision can be made.
Why is Legal Due Diligence Important?
Legal due diligence is vital because it enables the potential buyer of the company to make informed business decisions based on the unbiased and professional views of a lawyer.
Legal due diligence allows the potential buyer of the business to:
- Understand the new business,
- Place a monetary value on the new business,
- Gather information to use in negotiations with the seller,
- Gather information to be included in the Sales and Purchase Agreement,
- Identify deal-breakers and major problems which may make the transaction a bad idea, and
- Rely on professional and unbiased advice.
Legal Due Diligence Process
A legal due diligence investigation takes place in three stages.
- Preparation – setting goals and priorities against time and cost pressures.
- Investigation – collection of facts and documents, conducting of interviews
- Results – your lawyer will present his findings and summaries as a formal legal opinion. This may be written and/or verbal.
What is Normally Covered in Legal Due Diligence?
The seller usually provides the buyer with a list of current and impending litigation cases involving the company. These include criminal proceedings, tax proceedings, civil suits, potential future litigation, etc. Typically, the buyer also conducts additional investigations to assess the company’s litigation history. Understanding these litigation matters significantly assists the buyer in determining the viability of the deal.
Intellectual property forms, such as copyrights, trademarks, trade secrets, and patents, provide strategic advantages to companies, especially when they are protected through official registration with the relevant authorities. The buyer needs to ensure that this protection is robust enough to ensure long-term success. If the company uses others’ intellectual property, the buyer should confirm the existence and lucrativeness of the usage licenses. If the company utilizes certain law firms or patent firms for intellectual property needs, the buyer would also want to evaluate them for their effectiveness.
The buyer would generally review all existing staff employment agreements, confidentiality agreements/ NDAs, and trade restraint agreements to ensure that these contracts are watertight and drafted in the company’s best interests—these staff will soon become the new owner’s employees. Special attention is typically paid to the agreements concerning senior staff of the company. The buyer may want to ascertain that they are not in breach of confidentiality or restraint of trade agreements with their previous employers or violating their previous employers’ intellectual property rights. The buyer would also typically look into the loans taken from or given to employees and directors.
Insurance coverage is a vital part of any modern business. The company buyer should review all insurance policies and assess them for sufficient coverage. These might include policies related to general liability, worker’s compensation, professional liability, personal and property insurance, directors and officers insurance, product/service liability, litigation liability, vehicles, buildings, and intellectual property.
The buyer should ensure that all documents related to the company’s incorporation are present and correct. There should be a thorough examination of the company’s Memorandum and Articles of Association, previous minutes of meetings, board resolutions, and key decisions.
The buyer should ascertain that all contracts entered into by the company are reasonable, advantageous to the company, and disclose manageable risks and duties. This process would typically involve a detailed examination of agreements and contracts with dealers, vendors, suppliers, banks, joint-venture partners, IT partners, IP partners, clients, and distributors. This exercise would also assist the buyer in determining the renewal dates of these agreements or contracts, hence aiding in future negotiation planning.
The buyer needs to have comprehensive knowledge of the rights that have been bestowed upon previous investors. Such rights could potentially restrict the shareholders and/or the board from performing certain actions or participating in certain transactions. If these rights exist, the buyer should ensure that they are either waived, cancelled, incorporated, or recognised in the Sales and Purchase Agreement.
We hope this article has been helpful and has provided you with valuable insights on what aspects to consider while buying a business, or even when gauging what potential buyers may be interested in.
At the end of the day, significant business decisions are most efficiently navigated with the aid of trained professionals. At IRB Law, our team of experienced corporate lawyers can provide you with sound advice tailored to your business needs. Consider reaching out to us today to discuss how we may collaborate for our mutual benefit.