Are you planning to invest in an existing business? If so, you need to know some legal gymnastics you must navigate in your journey.
1. As a new year starts, plans take off and it is typically all excitement for those investing their money in existing businesses. The truth is, the excitement breeds inclination to rush investment decisions and the critical steps you need to take before you invest are often overlooked or trivialized.
2. In this article, we briefly take you through the legal dynamics you need to know at a high level, if you are seeking to make an informed business decision which you will give you peace of mind.
3. There are a few agreements which you will need from your commercial lawyer, which you can share with the prospective seller of the of the business you want (as part of the negotiation process), and this would be a sale of shares agreement and also a shareholders agreement, if you are acquiring the business with other investors. In some cases, your lawyer may have to draft a sale of business agreement , if you are acquiring a business segment from the existing company.
4. It is very critical to highlight that the magic lies in what the sale agreement contain, and they should contain provisions not only protect you as an investor but enable you to have recourse if you discover hidden issues along the way after buying the business. We do this by ensuring that the sale agreement contains a condition precedent clause (or a clause which suspends operation of the whole agreement while certain things are being ticked off) which has important clauses, which are typically tailed based on the uniqueness of each deal and it is thus important that you appoint a lawyer who knows what they are doing.
5. The condition precedent clause will usually include a due diligence sub-clause which allows the investor to conduct an investigation on the affairs of the business by mainly looking (through third party professionals which the investor has to appoint) at mainly the financial and legal affairs. The financial affairs are typically assessed by accountants appointed by the investor and they look at financial documents and tax related documents. For the legal affairs a lawyer will have to be also appointed to look into legal matters arising from existing contracts with customers or clients or with landlords or suppliers, litigation issues, environmental issues and also the corporate structure of the business you are acquiring.
6. The other important condition is to provide for obtaining of all the legal or regulatory approvals necessary for the lawful implementation of the sale. The typical approvals include Competition and Consumer Authority merger approval (if the transaction meet the relevant thresholds), approval from NBFIRA if you are investing in a non bank financial institution, notification to Botswana Energy Regulator Authority if you are investing in an energy company.
7. The agreement also needs to be clear when risk and benefits will shift to the investor because issues typically arise relating to at what point does the investor enjoy the fruits of the business they are investing in, and this is a negotiation point however the cut off typically depends on receipt of payment of purchase price.
8. Another important consideration particularly where the entity being acquired is a large scale business, is to provide for reservation of a nominal percentage of the purchase price in a trust account for an agreed period, in order for price adjudgments to be made after the accounting books are checked by the investors accountants and also to cater for any undisclosed liabilities which are discovered during an agreed window period.
9. The other important clauses would be warranties and indemnity clauses where the sellers would be making representations and also guaranteeing the investor that they will compensate, in the event some of the representations turn out to be false after the sale. The agreement should also always contain the normal boiler plate clauses such as breach clause, non-waiver, governing law, non-variation, exclusion of representations not recorded, addresses for purposes of correspondence and litigation.
10. Once the terms are finalized, the agreement is signed and the investor commences the due diligence exercise and also obtaining the relevant regulatory approvals (both of which the costs should be clearly accounted for in the agreement). Upon fulfilment of the conditions and usually to the satisfaction of the investor the agreement becomes effective and the sale takes place, where the shares or business can be exchanged and the sellers being paid the agreed purchase price at a closing or completion meeting.
11. If these conditions are not fulfilled, such as if the due diligence uncovers a rot which was hidden from you or you could not see while walking around the establishment, you are free to walk away from the deal without having spent a single cent in paying the sellers.
12. As stated above in the case of investors investing as a consortium (in a form of a company), have to ensure that between themselves they have a shareholders agreement which records their rights and obligations which should be able to minimize room for conflict and having appropriate dispute resolution and deadlock breaking mechanisms.
13. With the above in mind, you may want to ensure that before you spend your hard earned money in an investment, you make a wise decision to set up an appointment with Armstrongs so that we can advise on all the necessary steps and appropriate agreements and most importantly terms which will give you a piece of mind and value for your money.
14. For more information on the above, please contact Mr Simon Bathusi at simon@armstrongs.bw or call +267 395 3481.
