"We are buying the business. Are we also buying its problems?"

The opportunity looked promising.

The company had operated for several years, maintained a recognised brand and served a steady group of customers. Its revenue appeared healthy, and the seller was ready to move on.

After a few meetings, the parties agreed on a price.

The buyer believed that he was acquiring a profitable business. The seller believed that the buyer understood what was being purchased.

Several months after completion, however, the buyer discovered unpaid tax liabilities, an ongoing employee claim and a customer contract that could be terminated following a change in ownership. The company had also been using a trademark registered personally in the founder’s name.

The buyer had acquired the business - but also inherited problems that had not been properly identified or addressed.

This is why a merger or acquisition should never be treated merely as a negotiation over price.

1. The first question is: What exactly are you buying?

A business acquisition is commonly structured as either a share acquisition or an asset acquisition.

In a share acquisition, the buyer purchases shares in the company. The company continues to exist as the same legal entity, with its assets, contracts, employees, rights and liabilities remaining within it.

Under the Companies Act 2016, a company has a legal personality separate from its shareholders. Accordingly, when the shares change hands, the company’s history does not disappear. Its existing debts, disputes, contractual obligations and compliance issues generally remain with the company.

The buyer may therefore gain control of the company, but control comes together with the consequences of how that company was previously managed.

In an asset acquisition, the buyer purchases selected assets or parts of the business, such as equipment, inventory, intellectual property, customer contracts or operational premises.

This structure may allow the buyer to be more selective. However, the transfer of each asset must still be properly considered. Contracts may require assignment or novation. Licences may not be transferable. A landlord, bank, authority or business counterparty may need to provide consent.

The legal structure should therefore be decided before the parties become committed to a purchase price.

2. A term sheet may carry more weight than expected

Many transactions begin with a letter of intent, memorandum of understanding or term sheet.

The parties may regard it as an informal summary of the proposed deal. Nevertheless, certain provisions may be intended to take immediate legal effect.

These may include:-

• confidentiality obligations;

• an exclusivity or “no-shop” period;

• responsibility for professional costs;

• access to company information;

• payment and treatment of a deposit;

• restrictions on public announcements; and

• the governing law and dispute resolution mechanism.

The document should clearly distinguish between provisions that are binding and those that remain subject to negotiation and execution of the definitive agreements.

Exclusivity should also have a reasonable duration. A seller should understand whether it is prevented from speaking to another potential buyer, while a buyer should not assume that exclusivity guarantees completion of the transaction.

3. Due diligence is not a box-ticking exercise

Before signing the sale and purchase agreement, the buyer should investigate what is actually being acquired.

A proper due diligence exercise may cover:-

• the company’s ownership and corporate records;

• its constitution and shareholders’ agreement;

• financial statements, borrowings and shareholder advances;

• tax matters and statutory compliance;

• material customer and supplier contracts;

• banking facilities and existing securities;

• licences and regulatory approvals;

• pending or threatened litigation;

• employment arrangements and key personnel;

• ownership or tenancy of business premises;

• intellectual property and data protection matters;

• related-party transactions; and

• existing guarantees, charges or other encumbrances.

Due diligence is not conducted simply to produce a lengthy report.

Its purpose is to identify whether the buyer should proceed, renegotiate the price, require certain matters to be resolved before completion or obtain specific contractual protection from the seller.

If a serious issue is discovered, the buyer may decide not to proceed at all.

Sellers should also prepare for this process. Incomplete records, undocumented payments and inconsistent explanations can weaken the buyer’s confidence and delay the transaction. A properly organised data room often makes negotiations more efficient.

4. Does the seller have the right to transfer the shares?

The person negotiating the sale may appear to be the business owner, but legal ownership must still be verified.

The company’s register of members should be reviewed together with the relevant share certificates, corporate records and any previous share transfer documents. Under the Companies Act 2016, entry in the register of members is evidence of legal title to shares.

The company’s constitution or shareholders’ agreement may also contain restrictions on transfer. Existing shareholders may have a right of first refusal. Board approval may be required. The shares may have been pledged as security to a bank or may be subject to an ongoing dispute.

These matters should be resolved before the buyer pays the purchase price.

5. Will the company’s contracts survive the acquisition?

In a share acquisition, the company remains the party to its existing contracts. This does not necessarily mean that every contract will continue without interruption.

Some agreements contain a change-of-control clause. Such a clause may require prior consent or allow the other party to terminate the agreement when ownership or control of the company changes.

This can be crucial where the company depends heavily on:-

• one major customer;

• a particular supplier;

• banking facilities;

• a lease of important business premises;

• a franchise or distributorship arrangement; or

• a licence required for its operations.

If the continued operation of the business depends on one of these arrangements, the required consent may need to be made a condition of completion.

A company may appear valuable because of its contracts. That value can change considerably if those contracts do not survive the acquisition.

6. The headline price may not be the final price

The parties may agree that the company is worth RM5 million, but that figure alone does not explain how much the seller will ultimately receive.

The transaction documents may need to address:-

• cash held by the company;

• existing bank debt;

• amounts owed to or by shareholders;

• the required level of working capital;

• payments made to related parties before completion;

• dividends or other value removed from the company;

• adjustments based on completion accounts; and

• earn-out payments linked to future performance.

An earn-out may help bridge a difference between the seller’s expectations and the buyer’s valuation. However, it can also create disputes if the formula is unclear.

The parties should agree on the financial metric, accounting policies, measurement period, access to records and the extent to which the buyer may change the company’s operations during the earn-out period.

A formula that looks simple during negotiations can become difficult once the buyer controls the business.

7. Warranties are more than standard wording

The sale and purchase agreement usually contains warranties given by the seller concerning the company.

These may cover the accuracy of corporate records, accounts, tax position, contracts, assets, employees, litigation, intellectual property and regulatory compliance.

If a warranty is inaccurate, the buyer may have a contractual claim, subject to the wording of the agreement and the applicable legal requirements.

The seller will commonly qualify those warranties through a disclosure letter. If a matter has been fairly disclosed, the buyer may be prevented from later claiming that it was unaware of the issue.

Known risks may be addressed through a specific indemnity. For example, if there is an ongoing tax audit or pending litigation, the seller may agree to compensate the buyer for losses arising from that identified matter.

These protections must be carefully negotiated. Relevant considerations include:-

• the financial cap on claims;

• the time limit for bringing claims;

• minimum claim thresholds;

• knowledge qualifications;

• the method of notifying a claim;

• control of third-party proceedings; and

• whether certain remedies are exclusive.

A buyer should not treat warranties as a substitute for due diligence. A seller, meanwhile, should not give broad assurances without understanding their potential consequences.

8. Signing does not always mean the deal is complete

The parties may sign the sale and purchase agreement on one date and complete the acquisition several weeks or months later.

During that period, certain conditions may need to be satisfied. These may include:-

• obtaining board or shareholder approvals;

• securing regulatory or third-party consent;

• obtaining a bank’s release of existing security;

• settling shareholder or related-party balances;

• renewing important licences;

• completing an internal restructuring;

• resolving specified legal issues; or

• obtaining the release or replacement of personal guarantees.

The agreement should state who is responsible for each condition, the deadline for fulfilling it and what happens if it is not satisfied.

It should also regulate how the business is operated between signing and completion. The seller may be required to continue operating in the ordinary course and obtain the buyer’s approval before taking major steps.

These controls help to ensure that the business delivered at completion is substantially the same business that the buyer agreed to acquire.

9. Selling the company does not automatically release a personal guarantee

Business owners frequently provide personal guarantees for the company’s banking facilities, tenancy obligations or commercial arrangements.

Selling the shares or resigning as a director does not automatically release the seller from those guarantees.

A seller who intends to exit completely should identify every personal guarantee and require a written release, replacement or other acceptable arrangement. Where appropriate, the release should be included as a condition or completion deliverable.

Without it, the seller may no longer own the company but could remain personally liable if the company later defaults.

10. Completion must be properly coordinated

An acquisition does not conclude merely because the buyer transfers the money.

The completion process may involve the simultaneous delivery of:-

• executed share transfer documents;

• original share certificates;

• payment of the purchase consideration;

• directors’ resignation and appointment documents;

• updated corporate and statutory records;

• control of bank accounts and online systems;

• company seals, records and operational documents;

• releases of charges or guarantees; and

• documents required for statutory lodgement.

The parties should agree on a completion checklist in advance. Funds and documents should be released in the correct sequence so that neither party is unnecessarily exposed.

Informally handing over the business while essential documents remain outstanding creates avoidable risk.

11. The people behind the business also matter

A company may depend heavily on its founders, senior management or a small number of key employees.

Before completing an acquisition, the buyer should understand:-

• who maintains the major customer relationships;

• whether key employees intend to remain;

• whether incentive or retention arrangements are required;

• whether employment contracts contain suitable confidentiality protections;

• whether bonuses are triggered by the change of control; and

• how knowledge and responsibilities will be transferred.

In an asset acquisition, employment arrangements require particular attention because the operating business may be transferred to a different legal entity.

The transaction may be legally complete, yet commercially unsuccessful if the people who understand the business leave immediately afterward.

12. A seller should prepare before looking for a buyer

Legal preparation should not begin only after an offer is received.

A business owner planning a future sale should consider reviewing the company’s position in advance. This may include:

• updating corporate and statutory records;

• documenting shareholder and director advances;

• resolving related-party arrangements;

• registering intellectual property in the correct owner’s name;

• reviewing key customer and supplier contracts;

• renewing licences and permits;

• formalising employee arrangements;

• identifying existing disputes and tax concerns; and

• organising documents for due diligence.

Early preparation allows problems to be addressed before they affect the buyer’s confidence or the company’s valuation.

Full and accurate disclosure may also reduce the likelihood of disputes after completion.

13. A successful acquisition does not end at completion

After completion, the buyer must integrate the acquired business.

Bank mandates may need to be changed. Customers, employees, suppliers and regulators may need to be informed. Systems, data, policies and reporting structures may need to be aligned.

If the seller’s continued involvement is necessary, the parties may require a transitional services or consultancy agreement setting out the duration of the handover, responsibilities, remuneration and confidentiality obligations.

The legal documents should support a practical transition - not merely record the transfer of ownership.

A successful merger or acquisition is therefore not defined only by an attractive valuation.

The parties must understand the structure of the transaction, investigate the business, allocate identified risks, obtain the necessary approvals and plan what will happen after ownership changes.

The right question is not simply, “How much are we paying?”

It is also, “What exactly will we own - and what responsibilities will come with it?”