Buying a company in Jamaica

In a time where everyone wants to be their own boss, starting a business tends to be the preferred choice for persons seeking to realise their dreams of entrepreneurship. Buying an existing company may, however, be a viable alternative. Though the acquisition of companies is often associated with corporate giants purchasing smaller companies, individuals can achieve the same by buying a company’s assets and/or shares. This purchase can be funded from several sources, including personal savings, loans, investors, etc.

Before any purchase is made, it is crucial to conduct a thorough due diligence exercise.

What is due diligence & why is it important?

Due diligence refers to the thorough investigation of a company’s affairs that a prospective buyer is reasonably expected to undertake before signing a purchase agreement.

It is essentially a measure of protection purchasers can take to avoid issues that can negatively impact the success of their investment. The purchaser becomes armed with knowledge of the company’s affairs beforehand, so they are fully equipped to tackle issues as they arise, make informed decisions and mitigate risks.

Failing to carry out the necessary due diligence is akin to diving into the sea with no life jacket when you do not know how to swim or…buying a puss in a bag.

Due Diligence Checklist

A due diligence checklist can be subdivided into three (3) main categories: financial, legal and commercial due diligence.

1. Financial Due Diligence

The purchaser should seek to ascertain the full scope of a company’s financial standing. This includes an examination of the company’s accounts and financial statements to assess its cash flow and profitability. The company should, for instance, provide its most recent audited and management accounts and Tax Compliance Certificate. The purchaser should also be made aware of any loans, balances and other financial commitments the company may have with financial institutions and other entities.

2. Legal Due Diligence

Legal due diligence involves an investigation into the company’s compliance with the applicable laws and regulations. This includes ascertaining whether the company has procured and maintained all licenses and applicable permits. A purchaser should also examine, among other things: the documents that establish and govern the company such as: the certificate and Articles of Incorporation of the company and for any subsidiaries; and a Certificate of Good Standing confirming that the company is in good standing with the Companies Office of Jamaica. This information assists the purchaser in determining whether the company is operating in accordance with its governing documents and has made all appropriate filings with the relevant government agencies.

This should also assist the purchaser with verifying who the directors of the company are and who would have the authority to sell the company’s assets. A purchaser should also request copies of share certificates and the company register, and compare same with the records at the Companies Office of Jamaica, in an effort to ensure that the person who may be selling his/her/its shares in the company is the legal owner of the shares. In accordance with the Companies (Amendment) Act 2023, which requires all companies to state the beneficial owners of the company, it is also necessary that the purchaser is aware of the beneficial owners of the company.

The purchaser should also request proof of ownership and proper title to all assets of the company. Searches can also be done of the national security interests in Personal Property Registry to ascertain whether any notices have been filed reflecting charges over personal property owned by the company.

3. Commercial Due Diligence

Commercial due diligence involves investigating the company’s business activities in the marketplace. This tends to involve an assessment of the company’s market share and customer demand. Commercial due diligence also includes an evaluation of who the company’s customers are and what the company’s relationship is like with them, for example, short term vs long term, high volume vs high concentration.

A prudent purchaser should also conduct the following:

4. Operations Assessment

By examining the inner workings of a company, a purchaser can evaluate several factors, including: the company’s efficiency and level of productivity, its strengths, weaknesses and vulnerabilities. Also, where necessary, strategies for improvement can be formulated.

5. Management and Human Resource Due Diligence

It is also beneficial for a purchaser to understand a company’s staff and management structure and be aware of its shareholders, directors, suppliers, distributors, subsidiaries, etc. An assessment of staff and management relations usually takes a legal angle where the purchaser can be aware of any employee disputes and assess the company’s compliance with all statutory obligations.

Buying a company is no easy feat. The importance of being a prudent purchaser and conducting due diligence, cannot be emphasised enough. Thorough due diligence will assist a purchaser with its/her/his assessment of the potential risks and liabilities associated with the target company. If you would not buy a puss in bag, then it is strongly advised that as a purchaser, you retain an attorney to assist with navigating this process.

Simone Bowie Jones is the Partner of Myers, Fletcher & Gordon, Attorneys-at-Law. She was assisted in the preparation of this article by Alicia Fraser, a student at the Norman Manley Law School and intern with the firm. Simone may be contacted via simone.bowiejones@mfg.com.jm or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.