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DUE DILIGENCE TO BUY A COMPANY IN NIGERIA

DUE DILIGENCE TO BUY A COMPANY IN NIGERIA

Nigeria’s economy is the largest in Africa, with industries ranging from agriculture and manufacturing to telecommunications, financial services, oil and gas, etc. This diversity has created endless opportunities for both local and foreign investors.

Nigerian companies, mostly Small and medium-sized enterprises (SMEs), often thrive in sectors like technology, logistics, retail, and fintech, which makes them targets for acquisition. For investors, buying an established company is an excellent way to quickly expand and make profits than starting from scratch. However, to succeed in the acquisition of a company in Nigeria depends on thorough due diligence. 

Failure to conduct due diligence can expose you to huge economic, legal, and financial risks like unpaid debts, lawsuits, tax arrears, or unresolved regulatory fines, etc. Thankfully, this article will guide you on the due diligence to undertake to help you mitigate risks that could cripple your business after acquisition.

Benefits of Buying an Existing Company in Nigeria

Buying an already-established company comes with numerous benefits. Whether you are buying the target company through acquiring its shares, management buyouts, mergers, joint ventures, or by way of franchise purchase, here are five benefits why you should undertake this venture:

  • Immediate Market Presence

Buying an existing business gives you an established customer base, brand recognition, and trust within the market. This provides you with a competitive edge, especially in sectors like technology, fast-moving consumer goods, and real estate.

  • Easier Regulatory Navigation

Complying with different Nigeria’s industry regulatory and legal frameworks as a new company can be time-consuming. However, an established company may already have the necessary licenses, permits, and government relationships that you need to set the ground running.

  • Trained Workforce

An established company may have a trained and knowledgeable workforce that is familiar with the business practices. This workforce may have valuable insights on improvements that the current owner overlooked, as against hiring and training an entirely new workforce. 

  • Cash Flow

Unlike a startup, an established company typically has an existing revenue stream to provide operational cash flow from day one. This can save you time and working capital that you would have spent starting from scratch with a completely new business.

  • Business Goodwill

Lastly, you don’t have to build a goodwill reputation from scratch because the current owner would have already established a strong reputation and customer loyalty. Goodwill takes years to build. By buying a company with existing goodwill, you can immediately benefit from its positive brand recognition, and leverage its existing market position.

Key Considerations Before Acquiring a Business in Nigeria

The idea of buying a company in Nigeria is enticing but complicated. If you are considering buying a company, then conducting due diligence is important to ensure that you make informed decisions. Here are due diligence factors to consider:

  • Question the Reason for Sale

One major question to ask when buying a company in Nigeria is why it’s being sold. This is important especially if you are being invited to take over the business. Knowing the real reason behind the sale can help you avoid financial losses or damage to your reputation if the business has financial trouble, internal conflicts, bad publicity, or ongoing legal issues.

  • Legal Due Diligence

You must understand Nigeria’s legal and regulatory framework for the industry you are interested in and ensure it complies with the relevant industry-specific regulations. Therefore before finalizing the company’s acquisition, you must conduct these comprehensive due diligence:

  1. Ensure the company is duly incorporated and registered with the CAC. 
  2. Verify the current shareholders and ensure no undisclosed agreements could affect your ownership.
  3. Ensure that all the required regulatory filings for the company are up-to-date and have not incurred any fines from any regulatory authority.
  4. Review the company’s financial statements, tax filings, and any debts, ongoing or past litigation, or liabilities.
  5. Ensure the company holds the necessary licenses and permits for its operations, and that these are up to date.
  6. Review existing contracts with suppliers, customers, and third parties to assess obligations or risks, especially long-term or unfavorable ones.
  7. Ensure all assets like real estate, intellectual property, equipment, stocks, shares, etc are outrightly owned and properly valued.
  • Financial Due Diligence

The main goal of buying a company is to make profits quickly. Therefore, you must review the financial condition, and day-to-day operations of the company you intend to buy.  Check the financial records for any possible debts or risks focusing on these key areas:

  1. Analyze at least the last 3-5 years of audited financial statements to assess the company’s profits and liabilities.
  2. Identify any outstanding loans, overdrafts, or liabilities. Verify the company’s ability to service its debt.
  3. Check tax filings, including income tax, VAT, and withholding tax, to confirm there are no outstanding obligations to tax authorities.
  4. Evaluate the company’s assets, including real estate, equipment, and intellectual property, to ensure they are properly valued and free from encumbrances.
  • Conduct Operational Due Diligence

Conducting operational due diligence means evaluating the target company’s day-to-day operations to ensure everything runs smoothly and aligns with your expectations. Therefore, you must:

  1. Review the qualifications and experience of the key management personnel to determine if they will be retained after the acquisition.
  2. Review employee contracts, including any severance packages, pensions, or union agreements that could become liabilities.
  3. Review the company’s key suppliers and customers.
  4. Inspect the company’s physical assets like offices, warehouses, and machinery to ensure they are in good condition and meet operational needs.
  5. Review the sales strategy, marketing efforts, and customer acquisition channels to determine their effectiveness and potential for growth.
  6. Review the company’s insurance policies, including coverage for property, liability, worker’s compensation, etc.
  7. Verify ownership and validity of intellectual property rights such as patents, trademarks, and copyrights, proprietary software.
  • Engage Professionals

Engage experienced experts like lawyers, accountants, asset valuers, and consultants who understand the Nigerian market and can guide you through regulatory requirements, contract negotiations, and due diligence. Lawyers can help you review the acquisition agreements, check the legal status of the company, and ensure a legal transfer of ownership of the company, etc.

Conclusion

With the right strategy, buying a company in Nigeria can be a powerful step towards long-term profitability and market dominance. However, success depends on thorough investigation and planning. Failing to investigate before buying a company in Nigeria can leave you vulnerable to financial, legal, and operational risks.

These risks could lead to huge financial losses, legal complications, and even the failure of the business post-acquisition. But by taking the time to thoroughly evaluate the target company, you can avoid these risks and make a sound investment decision. Therefore, we advise that you engage our law firm to handle the legal complexities on your behalf.