Six key points to consider before buying a business

Are you considering entering the SME business owner community by taking that sizeable leap to purchase an existing business? If so, here legal eagle Hannah Sandona offers six crucial things to consider before committing.

Are you considering entering the SME business owner community by taking that sizeable leap to purchase an existing business? If so, here legal eagle Hannah Sandona offers six crucial things to consider before committing.

1. Due diligence: Conducting due diligence is a vital step in the purchase of a business. You should examine the following: 

  • Corporate structure of seller.
  • Financial records.
  • Employment contracts.
  • Tax compliance.
  • Material contracts (customers and suppliers).
  • Employee records.
  • Intellectual property.
  • Legal compliance.
  • Business assets.
  • Company records.
  • Insurance claims history.
  • Security interests over seller or assets.

    Failure to conduct proper due diligence can result in the purchase of a business that has major financial problems, is subject to pending litigation, is selling assets that it does not genuinely own and many other issues which can be avoided if due diligence is conducted thoroughly. Further, it should give you a true indication of the value of the business and identify whether you are paying too much or just the right amount for it. 

2. Is purchasing the business your best option? Ask yourself why you are buying the business. Is it because there are assets that you want? Is it the name and good reputation? The client base? Or is the business as a whole a good purchase? Your answers will help you determine whether buying the business is the best way to get what you want. For example, if you only want the plant and equipment, perhaps an asset purchase is more suitable to your needs.

3. Get advice from a lawyer and an accountant: When you purchase a business, there are a number of legal and taxation implications. Receiving advice from a lawyer and an accountant prior to signing any contract and throughout the due diligence process will ensure that any legal or financial issues that arise are dealt with effectively and efficiently.

4. Leases: Determining whether a premises lease is in place and if so, identifying the conditions under the lease are imperative steps that need to be taken when purchasing a business. In examining the lease, you need to determine whether it is able to be transferred, or if you need a new lease. If you need a new lease, there may be consequences, including a possible rental increase. The location of premises can be critical and a change of location may be detrimental to the business.

5. Employees: Before entering into an agreement to purchase a business, you will need to consider whether you wish to take on its current employees. You need to be aware of their current employment contracts and your liabilities in accordance with them. If you do take on the employees, the purchase price will generally need to be adjusted to take into account any leave entitlements that are owed to the employees. Should you decide not to take on the existing employees, a prudent purchaser would ensure that the seller pays out the appropriate redundancies. You should also think about the reaction of employees to the purchase of the business; you may encounter low morale, resistance and staff departures during the transition and afterwards if the process is not well managed.

6. Have a plan: Prior to entering the contract, make sure that you have a plan and a realistic budget. The plan should outline ways to make the business more successful, including ways to set it apart from its main competitors. The budget should take into consideration possible injections of cash into the business, if required, and be realistic about other potential costs. If you are down to your last dollar before you start running the business, perhaps now isn’t the time to take the leap.

Hannah Sandona is a solicitor in the Brisbane office of CBP Lawyers.

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