Are you looking at buying a business? Here's what you need to know.
You’ve decided that you want to take the leap and buy a business. It may be something you have been looking into and researching for some time, or maybe you’ve decided to go out on a whim and try your luck with something new. Whichever way you have gotten to this point, it is important to delve deep when it comes to completing due diligence when purchasing an existing business. Below we have set out some important information to keep in mind before you sign and exchange a contract to purchase a business.
Why - The first thing you need to understand about the business for sale is why it is for sale. Is the vendor/s retiring? Is there financial difficulty? Is the vendor no longer interested in running a business? Is the vendor moving away? Whatever reasons there are, you need to know them. The REAL reasons. These may not be readily apparent from your conversations with the agent or owner. Consider making enquiries with the customers and neighbours of the business to determine whether what the vendor says is stacking up. Visit the business unexpectedly throughout different times of the day and week. Get to know the business you are looking to buy and don’t rely on the vendor/s to give to the full details.
Financials - Review the financials. You may be a whizz at the numbers and can determine that the business is making a profit. It all looks good on paper - hence your eagerness to proceed with the purchase. Before signing off on what could be one of the biggest deals of your life, it is best to engage a forensic accountant to review the financials to get the bigger picture of the business and how its operations have been running over the years. Consider obtaining an independent valuation. A forensic accountant and/or business advisor can uncover glitches you could not have imagined or expected. Imagine if you were unaware of a capital asset which was run down and required significant repairs to run at peak performance. Repairs for some capital assets can prove very expensive. Best to play it safe and get the go ahead from someone in the know. An accountant is also the best fit to advise you on tax implications, business structures and any other accounting information you may need.
Ask the customers and research! - Who better to determine the goodwill of the business than the customers themselves! Get in touch with as many customers as you can to ask them their opinion on the service and rapport of the business you’re about to buy. This can be done simply; by the business issuing a survey, which prevents any issues regarding privacy and disclosure. If you’re getting positive feedback from customers who are happy to return to the business and refer their friends and family, then it will give you more confidence about the future prospects of the business you are about to buy. You can also consider asking competitors, suppliers and local business representatives and chambers of their thoughts and feelings about your prospective new business to get a better idea of the general opinion of the business within the local market.
Legalities - Approach a lawyer who has experience in buying and selling businesses. Your lawyer will go through the terms of the contract with you and ask you questions to determine any negotiations that may need to take place. This can include negotiations concerning items such as:
Capital assets
Inclusions
Debts
Licences
Training
Existing business contracts
Valuation and price of goodwill and stock
Lease terms and future options to renew (enquiries may need to be made with the Lessor)
Settlement date
Your financial capacity to borrow and buy the business
Employees and future employment contracts
Restraint /non-compete clauses
IP - business name, patents, trade marks, social media and website domain ownership
GST, CGT and stamp duty
Adjustments on settlement (rent and outgoings, employee entitlements, debtors and creditors, etc)
Insurances
Dispute resolution procedures
For more information and articles on buying a business, you can visit:
NAB website - “Your essential guide to buying a small business”
Department of Industry, Innovation and Science website - “Buy an existing business”
The above information is only a simple list of factors you need to take into account and research prior to committing to the purchase of a business. We recommend consulting a business advisor and/or accountant at the same time as consulting with your lawyer when you are considering your options.
Ardent Lawyers works collaboratively with local business advisors and accountants to ensure our mutual clients feel comfortable and understand the processes involved when taking the steps towards purchasing a business.
If you have any questions about this article, or require assistance to purchase your very own business, contact your local Shoalhaven lawyers, Ardent Lawyers on (02) 4444 6808 or contact@ardentlawyers.com.au