torstai 27. helmikuuta 2014

Buying a small business and its DD in Finland

Buying a small business and its DD in Finland

Buying a decades old Finnish family owned company may be a surprising experience for a professional foreign buyer. The owners are often skilful in their business but certainly not experienced in M&As. Dealing with such a seller calls for patience and understanding. The sellers last acquisition may have taken place decades back and he may have great difficulties in appreciating the necessity of due diligence let alone the modern SPA structure including indemnities and warranties.

 In the course of the initial negotiations on the terms of the contemplated acquisition, the buyer does not usually have very detailed knowledge of the object company. The buyer normally relies on information received from the seller, what is publicly known about the target company, any information released by the seller, any knowledge of the target’s business acquired from previous dealings, perhaps as a supplier or a competitor. The buyer should get started with a search of the company’s financial information at the Finnish Trade Register. It provides the buyer with initial information about the object company’s past achievements.

The parties usually draw up heads of agreement or a letter of intent to record the mutual understandings of their preliminary discussions and to provide a helpful basis on which to proceed to the drafting of the main agreement.  It is customary to agree on the purchase price in a non binding manner. Yet, the purchase price is approximate and always subject to the findings of the subsequent due diligence. The buyer will not, however, want to enter into a binding commitment to acquire the target until it has acquired as much information as possible about it, and this information gathering stage is often known as “due diligence”. The aim of due diligence is to furnish the buyer with essential management information to enable it to decide whether or not to go ahead with the proposed acquisition and, if so, on what terms. In particular, the results of the investigation may prompt the buyer to renegotiate the price for the target. Now, this may a novelty to a seller of a small family owned business and require some convincing from the buyer’s side. I have often met sellers who insist on that the price should be final already at this stage.

While the due diligence process can provide the buyer with a considerable insight into the business of the company it is planning to buy, it is important to be thorough and careful. Although we do not have the strict principle of “caveat emptor” (buyer beware) of the Anglo-Saxon system, we are not very far from it. Therefore the buyer should seek to protect itself in two ways,(1) like any prudent buyer by obtaining as much information as possible on the target company and (2) by backing that up with as extensive warranties and indemnities as possible in the acquisition agreement. The purpose of the warranties and indemnities is to provide the buyer with contractual protection should the object company not turn out to be as good as expected.  

It is important to remember that a thorough investigation of the target company is essential to reveal areas where the buyer is at risk and needs to protect itself by including warranties and indemnities. Having said that, there may be some complications ahead with family owned companies. In the  60’s and 70’s it was common in Finland not to include any representations and warranties in the SPAs of small companies and just make a statement that the buyer had had access to the annual accounts of the target company. Therefore a seller of that kind may be quite upset when receiving a draft SPA including several pages of representations and warranties. Many of those representations and warranties could be omitted because they are covered by the Finnish legislation and thus make the draft SPA shorter and easier for the seller. My experience is that with thorough work the SPAs could be made shorter and more adapted to the Finnish legal system thus gaining more clarity without losing any of the accuracy.