Here are 3 common mistakes I would have thought are important to know if you are planning to buy a business in Poland.
1. Due Diligence, Due Diligence, Due Diligence
Due diligence is a crucial stage of any M&A transaction. It is essentially a legal review of documents and information on the target company or assets. The primary goal of the due diligence is to find legal risks. Then, to analyze, assess, and describe those risks. Finally, to recommend mitigating measures.
Not everything is as it seems and that is especially true when buying a business. You need to do due diligence to make sure the information presented to you is valid and shows an accurate picture of the condition of the business. You want to make sure you know what items the business actually owns, what is leased, what is owed to the business and what the business owes to others. You do not want to buy a business only to find out there is a huge pile of bills that are due and the income you were expecting does not materialize. Doing a solid job of due diligence will help you avoid buying the wrong business or paying too much for the business.
2. Proper review of the financial statements
The owner can produce financial statements that show a business is thriving. This needs to be checked. You need to properly review financial statements of the target company to make sure the information presented to you is valid and shows an accurate picture of the condition of the business. You cannot do it all just by yourself - you should go out and seek advice from someone who understands exactly what would be required to put an accurate financial statement together. A good and trusted accountant will be able to ask for supporting documentation which will easily tell you whether the business is generating what the seller alleges it is.
It is also recommended to go behind the actual figures and check the general ledger and its entries. A general ledger is a book that bookkeepers use to record all relevant accounts. The general ledger tracks five prominent accounting items: assets, liabilities, owner’s capital, revenues, and expenses. Typically, transactions are posted in general ledger accounts. Later, account balances are calculated and transferred from the general ledger to a trial balance before appearing on a company's official financial statements.
3. Structure of the transaction
To sign the good deal you need to have a good deal structure. Going for the simplest solution (i.e. money in exchange for the share certificates from the seller) is probably the worst structure You have to structure the transaction in the way that you re-risk it. De-risking means that you lower the risk and not over-pay. There are many ways to achieve it.
As in the case of reviewing the financial statements, you cannot do it all just by yourself - you should go out and seek advice from a commercial lawyer. You need a commercial lawyer to assist you in reviewing and drafting the purchase agreement. In a typical purchase agreement, there will be terms where if the sellers makes false representations, the buyer will have recourse in terms of going back and making a claim against the seller and trying to get out of the transaction. Doing a solid job of due diligence will help you to agree better terms with the seller and take into accounts most of the identified risks.
So, to avoid common mistakes when buying a business you need a good commercial lawyer and a trusted accountant. It is best for you if the commercial lawyer and the accountant know each other well and have a business relationship but at a minimum at least have these two advisors out there working for you.
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