Businesses and Companies Acquisition

Acquisition of businesses and companies

What do you need to know about selling an existing active business?
When wanting to sell an existing active business with sales, the seller should approach the transaction with knowledge.

To sell an existing business, just like selling any property, you need to know what you are worth in order to know how much money to ask for. That is, a valuation of the property needs to be done. For the sake of comparison, when it comes to an asset like real estate, it is quite easy to estimate the value. The broker tells you a price range, the market tells you based on similar transactions what the price is, etc.

However, when it comes to selling a business, it is true that there are brokers who deal with the sale and purchase of businesses, and who offer second-hand businesses for sale. However, these brokers are not similar to real estate brokers. That is, while real estate agents can compare "apples to apples" by comparing similar apartments they have seen and prices to those apartments, in the case of selling businesses, there are not necessarily similar transactions to compare, for several reasons:
- A business with sales in a certain amount is different from a business with sales in a larger or smaller amount. Both have different risks, including liquidity risks, and also different needs, for example marketing needs or investments for growth, or even investments for development needs.

- A business in a certain field is different from a business in another field, and certain fields have different potentials, with different profit expectations. In addition, selling a business that has developed technology is a completely different thing than selling a business that sells clothes.

and other differences between businesses.

Therefore, if you want to sell a business, the first thing to do is to carry out a business valuation.

What should be considered when buying an existing active business?
Buying an existing active business is by definition not the same as selling an existing active business.

It is true that those who are interested in buying an existing active business, should first of all carry out a valuation of the business that they are considering buying, in the same way that the seller does a valuation of the business. However, the buyer's valuation should be independent, and it is not desirable to base it on the seller's valuation, and this is because it has been statistically proven that the seller's valuation is biased, consciously or unconsciously, in favor of increasing the value of the business, in a way that will increase the value of the sale for the seller.

The buyer separates money and receives a live business, that is, a business with sales. Since the money he pays should reflect the profits and profit potential from the business, it is necessary to make sure that that profit potential is established and real.

The other key difference in buying an existing active business from selling an existing active business is that it is required to perform comprehensive legal checks to make sure that the ownership of the business really passes to the buyer, and that the business is not threatened by a hidden legal problem.

For the purpose of illustration, you can give as an example the sale of a salad making business, but the business has been operating without a business license for several years. Another example would be a former employee of the company who threatened to sue the company for tens or hundreds of thousands of shekels, and immediately after buying the business he sues the buyer of the business.

Just like buying an apartment or buying real estate, all of this and more would have been avoided through a proper legal review of the business by a business lawyer who knows what to check when buying an existing active business, just like with any other property you intend to buy.

What is the difference between selling a goodwill and selling a business?
Goodwill is actually "excess cost" - the difference between the net asset value of the company and what the buyer is willing to pay for it. That is, the company has assets whose value is X, but the buyer is willing to pay X+100 for the company, and that 100 is excess cost, which is actually goodwill.

Goodwill can be excess cost that is not attributed to specific assets, or excess cost that is attributed to specific assets.

Goodwill that can be attributed to specific assets is, for example, in a situation that comes as a technical result because of differences between the historical values ​​of assets on the balance sheet of the acquired company and the market value of those assets. In such a situation it is clear where the reputation comes from. For example, a holding company that owns only one building that was registered according to a historical cost of NIS 1 million, but when the company is purchased, the seller wants the building's market value, which is NIS 2 million, and therefore sells the company for NIS 2 million. In such a situation the reputation will be justified.

On the other hand, regarding unattributed "excess cost" (goodwill), there can be two situations:

1. I paid because I believe the company has growth potential that is not being expressed because of the accounting rules, or
2. I paid extra because I want the deal and that someone else won't buy the company.

Anyone who has looked for businesses to buy and talked to various sellers, has surely come across the statement "I am giving away the business and its assets for free, and I am selling reputation." The business's equipment may not be worth the amount the seller is asking for, so the difference between the value of the equipment and the sale amount is what can be called "goodwill".

How to prepare the business for sale?
The first thing is to prepare financial statements. Every process of selling an active business starts with financial statements. The financial statements are a profit and loss statement, a balance sheet, and a cash flow statement. Also, VAT reports must be prepared to make sure that what appears in the report is indeed what was reported to the VAT.

After that, economic data on the market must be prepared, such as the growth potential of the industry, and the growth potential of the business.

At the same time, a sales agreement must be prepared, and a file of what is called a "due diligence" must be prepared. Due diligence is a test that the buyer does to verify the "adequacy" of the purchase, i.e. whether the proposed deal is suitable for execution or not.

As part of preparing a company for sale, it is necessary to ascertain what the company's contractual obligations are towards each person or entity, so that it will be possible to understand which contracts the company has signed.

It must be understood that in the sale of a limited company there is no such thing as an "AS-IS purchase". In the sale of an active business, the seller undertakes to the buyer that apart from those contracts or obligations, there are no additional obligations to the company. This means that if such obligations are suddenly discovered, no matter at what stage in the existence of The company, the buyer has the right to go back to the seller and ask for compensation for any such obligation, since this obligation would have caused the price originally paid for the business to be reduced, and it might even have caused the buyer to not have agreed to buy the business at all if he had known about the existence of this obligation.

Small and medium companies
Performing small business due diligence is essential for potential buyers to fully understand the risks, opportunities and overall health of the target business. Despite the size of the business, a systematic and comprehensive approach to due diligence is essential. We will try here to describe the main stages and considerations for performing due diligence in a very small business.

1. Financial due diligence:
The due diligence process should begin by carefully examining the financial health of the business. Financial statements, including profit and loss statements, balance sheets and cash flow statements must be examined to assess profitability, liquidity and solvency. The accuracy of financial records must be verified by matching bank statements and other financial documentation. Pay close attention to any pending debts, liabilities or legal issues that may affect the financial stability of the business. In a small business, where financial resources may be limited, understanding the dynamics of cash flow is especially essential. Contact the business owner or management to gain insight into the financial decision-making processes and identify potential discrepancies that may require clarification.

2. Legal and regulatory due diligence:
Given the size of the business, the legal and regulatory landscape can significantly affect its operations. Start by reviewing contracts, licenses, permits, and other legal agreements to ensure compliance with applicable laws and regulations. Try to identify any existing legal problems, any pending lawsuits against the business or contractual obligations that may pose risks to the purchase. In a very small business, the personal relationships of the owners may play a significant role, so understanding any informal agreements or understandings is essential. In addition, one must learn what intellectual property rights are to ensure that the business owns them, and assess whether there are potential risks of infringement. Furthermore, employment contracts, employee relations, and compliance with labor laws must be legally reviewed to assess A. The stability of the workforce and b. Potential future financial obligations towards the employees.

3. Operational due diligence:
Beyond the financial and legal aspects, it is essential to carry out a careful examination of the current operation. Evaluating the efficiency and effectiveness of key business processes, inventory management and supply chain relationships. One must try to understand what the customer base is, the market positioning and the competitive landscape in order to gauge the sustainability of the business model. In a very small business, the owner's role may be central, so ask the potential buyer about their plans after the acquisition to ensure a smooth transition strategy. An assessment of the technological infrastructure should be carried out and any reliance on main suppliers or very large customers should be analyzed. For more, you can also reach out to key employees to understand their roles, potential employee retention issues, etc. Operational due diligence provides a holistic view of the small business, and helps buyers identify areas for improvement, as well as integration challenges.

Therefore, performing due diligence on a very small business requires careful attention to financial, legal and operational details. While the scale of the business may be smaller, the potential impact of overlooked issues can be significant. A thorough due diligence process ensures that buyers make informed decisions, mitigate risk, and position themselves for a successful acquisition and integration of the small business.

Big companies
A. Regulatory compliance: Large acquisitions need to address compliance with antitrust laws, competition laws, and other regulatory requirements. Failure to properly address these issues may result in legal challenges and regulatory obstacles.

b. Contracts and Liabilities: A thorough contract review is essential to identify tortious, other liabilities or potential legal disputes that may exist. Acquiring companies must evaluate the contractual relationships of the target company, including agreements with customers, suppliers and employees, to understand any legal implications.

c. Intellectual Property: Protecting intellectual property is essential in acquisitions, and the acquiring company must ensure that the target company has clear ownership of its intellectual property assets. This includes patents, trademarks, copyrights and trade secrets.

d. Labor laws: Acquisitions often involve the transfer of employees, and compliance with labor laws is essential. Understanding employee contracts, benefits and potential labor issues is critical to a smooth transaction.

e. Due diligence: Comprehensive legal due diligence is needed to uncover legal risks or hidden liabilities that could affect the success of the purchase. This involves a thorough examination of the target company's legal records and contracts.

The role of legal consulting services in business or company acquisitions:
Effective legal advisory services are crucial in navigating the complex legal landscape of business acquisitions. A skilled legal team can provide strategic advice, perform thorough due diligence and assist in drafting contracts and negotiations. Services include:

A. Legal Due Diligence: Legal advisors conduct in-depth due diligence to identify and assess legal risks associated with the acquisition. This includes reviewing contracts, litigation history, regulatory compliance and other legal aspects.

on. Regulatory Compliance: Legal advisors are required to guide the acquiring company through regulatory requirements, while ensuring compliance with antitrust, competition laws and other relevant regulations.

third. Drafting contracts and negotiations: legal experts assist in drafting contracts and managing negotiations to protect the interests of the purchasing company. This includes purchase agreements, employment contracts and any other legal document relevant to the purchase.

d. Risk reduction: Legal advisory services for the acquisition of companies aim to reduce legal risks by identifying potential problems at an early stage of the process and developing strategies to address them.

the. Integration Planning: Legal advisors contribute to the development of a comprehensive integration plan, ensuring a smooth transition and minimizing legal issues.

Business valuation
How do you estimate the value of a business? What is the valuation for my company? How much is my business really worth? The million dollar question is: How much is my business really worth? There are several methods for evaluating the value of the business.

If there was a calculator that allowed you to enter a simple number of data and get the valuation of your business, the story would be much simpler. By the way, this does not mean that attempts have not been made in the world to develop such calculators, but as far as we know, a reliable valuation calculator that can be relied on to provide a company valuation has not yet been developed.

The simplest valuation, but also the most imprecise, is to take the total assets less the total liabilities of the company. Why is it inaccurate? Because this valuation estimates that the business actually has no existence and does not generate value for the economic system in which it operates. In Hebrew, this valuation basically assumes that the only value of the business is the value of its assets. This is true in the case of a holding company, or when the business is closed and when the company holding its assets is going to be dissolved, but this valuation is definitely not correct in cases of buying an existing active business.

As mentioned, there are other valuation methods, but it is too short to expand on them.

Buying a business - do's and don'ts

A legal check for the business we want to purchase is a very basic step.

Just like you check the numbers to see what the income from the business is, what the expenses are, what the profit before tax is, what the net profit is, etc., this is how a legal check should be done. Unless you like to gamble.

Even if you intend to purchase a small food business, a kiosk, or a toy store, the simplest thing is to ask if there is a business license from the municipality, and ask to see it, and ask to review (and legally check) the lease agreement of the physical place where the business is located.

Company acquisition
When it comes to a larger business, for example a large restaurant or a large cafe, a small chain of stores or a gas station, there is a very high chance that the entire business operates under a limited liability company. This means that the limited liability company owns the business, is the employer of the employees in the business , and the seller is the owner of the company - that is, the owner of the company's shares.

In such a situation, you are not "buying a business", but purchasing the shares of the company that owns that business.

Is that clear?

excellent.

Now, a limited liability company is a legal entity for all intents and purposes. Because of this, in addition to its ownership of the business, it can have all kinds of "rabbits" in its hat, hidden from the buyer's eye.

• For example, it could be that a certain employee was employed by the company but their rights were not paid in full. That employee has not yet sued the company but their full right to do so is preserved for 7 years.
• It may be that the company has committed in the contract to work with a certain supplier and to order a certain minimum amount of goods from him every month, which will greatly burden the company's cash flow.
• It could be that the company has signed a problematic lease that endangers the entire existence of the business, and this is the real reason the seller is offering his business for sale.
• It may be that the company has committed to pay its manager a large sum of money (perhaps the manager is also the seller).
• Maybe the company owes money to the tax authority.
• Perhaps financial lawsuits have been filed against the company for heavy damages or for the violation of intellectual property rights of another business, which will ruin its coffers, and this is the real reason the seller is offering his business for sale.
• Perhaps the company was fined with fines that have not yet been paid for work without a permit or in violation of the permit,
• Maybe even criminal charges were filed against the company in some matter, for example if they employed tourists or foreigners without a work permit, and this is the real reason the seller is offering his business for sale.
• No charges may have been filed but the company is under some sort of criminal investigation.
  This is just a small list of the things that must be checked when purchasing a limited liability company that operates a going concern.

You are the buyer, isn't it your right to ask for all this information? However, you don't always know what to ask. And sometimes, when the business is very big, the seller doesn't always remember or even know what he should tell you about his initiative.

It's easy for a buyer to say to a seller "I want to know everything", but when it's a huge business, with a lot of legal aspects, it's simply impossible to do it alone if you're not a lawyer.

We, as lawyers well-versed in the field, present the seller with ordered and detailed lists in the legal and accounting aspects, which will protect you and your investment funds from significant legal investment mistakes.

The procedure is as follows: you contact us (click here), explain to us what the transaction at hand is.

We contact the seller or his lawyers, and present a list of documents that we need to perform the legal review.

We receive the documents, check them, and submit a new list of documents to the seller or his lawyers as needed.

During the inspection process, we legally check the agreement for the sale of the company's business / shares (or draft such an agreement if the seller has not prepared one) based on these documents, in a way that will protect your investment in the best possible way.

And at the end of the process, the sales agreement is signed and executed ("closing").

Remember, every business purchase, from the simplest to the most complex, must undergo a legal review, unless you like to gamble. The more complex the business, and the larger the purchase, the more comprehensive the legal examination and requires more expertise.

Final tip: Spin-off - split. Did you know that when you purchase a large business that has several divisions, especially a listed company, it is possible to "strip" the business from "toxic" divisions? For example, you are interested in purchasing a company that has two divisions. In one division it provides management services to other's hotels, and the second division is a real estate business of building hotels and selling them afterwards.

The management business hardly requires any assets (it is a business that provides a service) and fill does not create large debts for the company. This business is very profitable. On the other hand, the company's real estate business consists entirely of assets, it creates huge debts for the company to finance the construction and is exposed to the risk of overbuilding in the industry, which causes the sale price of the property to be small or even unprofitable.

The losses of the real estate division are swallowed up in the profits of the hotel management services division, but oppress them, and the company grows but in an unstable and sometimes even loss-making manner.

If you want to acquire the company because of the hotel management services division, one way to "get rid" of the loss-making division is by creating a separate company, and transferring all the real estate assets and their huge debt attached to it. You can then "get rid" of the new company by selling this new company to another buyer, or even sell it on the stock exchange to the public.

Are you interested in selling the business? Interested in buying a company? As lawyers who deal with the purchase and sale of companies and businesses, including legal due diligence, we have many ways to help.

Contact us today and we will get back to you with the details!