Corporate, M&A-UAT

If you are a potential purchaser looking to take over another business, one of the most important considerations is to determine the manner in which you are to purchase the business. This may be through (a) purchasing the shares of the company comprising the business; (b) purchasing particular assets of the business from the company; or (c) purchasing the business of the company as a whole.

As a purchaser, you would need to consider the residual liabilities that you would be taking with you upon completion of the sale and purchase transaction. This may be ascertained by way of undertaking a due diligence exercise on the target’s business. Due diligence is an investigation or audit exercise carried out by your advisors (legal, tax, financial etc) on the target company. Due diligence on the target company would cover the following areas, namely, corporate information, financial position, contracts, properties, regulatory compliance, intellectual property, insurance, litigation as well as employment. Further to the above, it advisable that you should appoint a lawyer to negotiate your share purchase agreement/ asset purchase agreement/ business purchase agreement. A well negotiated share purchase agreement/ asset purchase agreement/ business purchase agreement should include a set of warranties and indemnities to protect your interests and rights (as a seller) and to minimise your liabilities and risks (as a purchaser).

As the purchaser would be given access to proprietary and confidential information relating to the target company (e.g. suppliers contracts, price list, etc.) during its due diligence exercise, it is important to ensure that the purchaser signs a properly-drafted non-disclosure agreement prior to kicking off the due diligence exercise to restrict the purchaser from disclosing or using the proprietary and confidential information. This is especially so when the purchaser is also a competitor of the target company. Further to the above, it is advisable that you should appoint a lawyer to negotiate your share sale agreement/ asset sale agreement/ business sale agreement to ensure that the agreement protects your interest as a seller. Your lawyer should endeavour to negotiate for you a limited set of pre-closing conditions, favourable payment terms, a limited and narrow scope of warranties and indemnities, etc.

There are a few methods in which a company may be valued. This includes:

1. Debt free/ cash free valuation:

Cash free, debt free by its simplest definition means that when a buyer purchases a company and its assets, it is on the basis that the seller will pay off all debt and extract all excess cash prior to completion of the transaction. Suitable for Buyer who just want to buy over the assets/clientele etc.

2. Net asset value:

Net asset value (NAV) is the value of an entity’s total assets minus its total liabilities. Suitable for assets heavy target.

3. Earning:

This is based on the net earnings of the target and will most likely have earning multiple applied to it. Suitable for trading/service sector target.

4. Replacement cost:

A replacement cost is based on the assumption that the costs required for a business to re-establish itself to the present state.

5. Comparative ratios:

Comparable ratio analysis is based on comparing companies based on similar metrics (earnings, net assets value etc.) to determine their company value.

6. Combination:

A combination of the methods above to determine an average valuation for the target.

These are the main methods but there are other valuation methodology may be more relevant depending on the target and objective’s of the client. Valuation is more of an art than a science and more often than not, valuation exercise will use multiple methods instead on single method. Hence inputs from accountant could be helpful for the buyer in the negotiation process. It is advisable to engage and consult an accountant with respect to the best method for valuation of a company.

A merger or an acquisition is a complex process which almost always require the involvement of a lawyer. If you are purchasing a company, you will need legal advice to minimise your exposure against residual liabilities after the sale is completed. If you are a seller, you will need legal advice to minimise the risk of any claims being brought against you by the purchaser after the sale is completed.