Buying the assets, not the history: due diligence steers an industrial manufacturer to a cleaner acquisition
Due diligence uncovered hidden related party and transfer pricing risk, steering a manufacturer to buy its landlord's assets instead of the company.
A manufacturer was weighing whether to take over its landlord's company or buy only its property and operating assets. KTP's due diligence found the target's business was built on related party dealings, bringing hidden tax and transfer pricing risk. The client chose to buy the assets, and completed the purchase on the most cost-effective terms.
The result
The client acquired the land, buildings and plant directly and secured the operating base it wanted on the most cost-effective terms. The vendor company's related party arrangements, its borrowings, the guarantees attached to them and any transfer pricing exposure from past related party dealings all stayed with the vendor.
At a glance
Client: Malaysian manufacturer of specialised industrial equipment
Transaction: Proposed acquisition of its landlord's business, including land, buildings and plant
Service: Financial due diligence, with asset verification and legal document review
Decision supported: Whether to acquire the company or purchase only its property and operating assets
The challenge
The client operated from premises leased from the vendor. When the vendor offered to sell its business outright, the opportunity fit the client's aim of owning its operating base.
What the client could not decide was how to buy. Taking over the company would mean acquiring it as it stood, including obligations that did not appear on the face of the accounts. Buying the assets would give a cleaner separation, but with its own costs, transfer formalities and tax consequences. Without looking inside the company, there was no way to tell which route was better.
Our approach
KTP analysed the target company's financial position and trading pattern. We verified its property, plant and equipment, reviewed the title documents, charges and agreements over those assets, and examined its records for obligations that would pass to a buyer of the shares.
We then set out the advantages and disadvantages of each option, a share takeover and a direct asset purchase, so each risk could be weighed directly in the decision.
What we found
The business depended on related parties. Most of the company's sales, purchases and income came from dealings with related parties. Its results reflected group arrangements rather than a standalone business, and were unlikely to continue once ownership changed.
Transfer pricing risk would come with the company. With related party dealings on that scale, the prices charged between the company and its related parties could be challenged by LHDN for past years. A buyer taking over the company would also take on that exposure, including any adjustments, surcharges and documentation shortfalls.
Assets and funds had moved within the group. Plant and equipment had been bought from related parties, and money had been lent to a related company. Carrying values and the loan's recoverability had to be tested rather than taken at face value.
Borrowings were secured on the property. Bank borrowings were secured on the company's property and backed by personal guarantees. In a share takeover, they would have stayed with the company.
KTP's View
Knowing the premises is not the same as knowing the company. When a target's business runs mainly through its owners' other companies, a buyer of the shares takes on those arrangements and the tax risk behind them. Due diligence turns the choice between shares and assets from a preference into a decision.
