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.
