• How-to

Owning a business, for most, is a huge ambition. However, as we grow closer to realizing our ambition, we realize how complex it actually is and more often than not, such complexities may turn into a serious problem which land us with something we did not sign up for.

To mitigate the risk of such complications, you should always avoid the temptation of rushing into a deal without the benefit of professional advise or help from experts. Although economic viability of investment options in India is driving the inflow of investment, you may keep in mind the following points before giving in to the urge of signing on the dotted line:

A. 3 Ws of a transaction
You should always keep the WWW—What, When and Why—of a transaction in mind before moving ahead into the deal.

1. What are you looking for?
Firstly, you should be clear at the start about what you want and what your requirements are—the sector you want to invest in, the location which might better suit your other businesses or purpose, the size of investment you are looking to make and so on.

2. When to finish the deal?
Secondly, you should know by when to put the lid on the deal and be prepared with an action chart which guides you through till the end of the deal and through its various stages, step by step.

3. Why is the business up for sale?
Finally, you should also ascertain the last W, i.e. why is the business for sale. Usually, reasons for sale range from an urgent need for money to rising debts or an approaching bankruptcy or the owners want to sell out their respective shares and cash out. You may use such urgencies of the seller to cash out of the business in your favor by negotiating a lesser price. However, you must still be cautious of such urgencies as there might be rising debts and liabilities lurking behind.

To be sure that the deal is smooth, the following step helps to reduce risk:

B. Legal analysis & risk assessment: Due diligence
The flip side of buying a business is that you must also embrace all potential and current liabilities of the seller, for any liability of the seller would potentially be your sole responsibility, once the sale is executed. Whether it is the mandatory compliances with the regulatory framework, or checking the health of the seller’s business, you have to be extremely watchful of all aspects of the seller’s business. Thus, the due diligence of the target company is the most decisive and critical factor of any profitable deal or transaction.
An outline of a thorough due diligence checklist for a company should touch the following heads:
1. Corporate profile and Capital Structure Insurance
2. Accounts and financial records/information
3. Taxes and other payments
4. Management and employee aspects
5. Information/computer systems
6. Securities and financing
7. Intellectual Property and trade secrets
8. Regulatory approvals
9. Litigation etc.
10. Business operations
11. Miscellaneous
12. Contracts/agreements generally
13. Sales and marketing
14. Property

Once the due diligence is completed and the results of the report are acceptable, only then should all the parties come to the negotiating table.

C. Closure work: Transition
Mostly people think that once the agreement is signed, the deal is done and celebrate the feat. However, the last step to a transaction, post signing the contract, is the transition to the new ownership, which is a big change for the people associated with the acquired company, especially employees, sellers and the customers of the company. Further, if you are a foreign investor and not a locally-known company or person, there may also be some socio-political issues which will have to be sensitively dealt with, advisably by getting professional help of local consultants or a good PR firm, which is useful for such work, as it is better aware of the system.

Transitional issues are mostly labor and management related, as a new owner comes in and alters the working and affairs of the company to suit his requirements and needs. Such drastic measures sometimes lead to insecurities in the workforce and create legal implications like retrenchment and lay-off lawsuits.

To ensure smooth transition, you should start the process from the very start of the deal, by spending some time meeting with chief employees, customers and suppliers of the company before taking over, and discussing future plans and ideas with them. Once such key people get involved, running the company becomes a lot easier. Transitional period usually ranges from a few months to a year or maybe longer.

Acquiring a company is not really as simple as buying something from a market store—you pay for it and leave. It is like a Pandora’s Box, you never know what it might be holding for you and what might surface next. You should go into a deal fully prepared and start step by step, following it up till the end.

©Entrepreneur May 2011

Diljeet Titus is Managing Partner, Titus & Co., Advocates

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accounts, analysis, business, buy, capital, company, corporate profile, deal, diljeet titus, investment, legal, liabilities, litigation, property, risk, structure, taxes, transition