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What to look for when buying a business

01 Aug 2015

Topics

  • Business Law

Buying an established business can be an exciting prospect. Its benefits include avoiding some of the uncertainty of starting a business from scratch, accessing some valuable goodwill and taking advantage of existing systems, contracts, employees, clients etc.

But before you launch head-first into the transaction, there are a number of important considerations you may need to keep in mind.

The first of these, of course, is the commercial reality. Is the business worth what the seller is asking? Can you make a profit out of the business? Simply, can you afford it? These are considerations for you and, usually, an accountant or financial planner. Naturally they require you to conduct careful due diligence of the business’ books and records. As lawyers we prefer to avoid the technical financial issues (because our calculators are probably only as good as yours…)

But there are also a number of legal issues to think about and that’s where we come in. Here are a few things to consider up front.

What are you buying?

Before talking about price, stock, equipment, etc, you first need to look at exactly what it is you’re buying. Are you purchasing a business (usually a collection of “assets” including goodwill, client-lists, equipment, intellectual property, etc), or are you buying a company (meaning the shares of a company)?

The two are very different and you must always distinguish a “business” from the “company” that carries on the business. If you’re buying a company from someone else, this requires them to transfer their shares to you and to retire as a director so you can take their place.

It is more common to buy a business and establish your own company to run that business. That is usually the preferred option as you can set up your own company without any of the baggage that may be hanging around in a company that’s been around for years (tax debts, unsettled law suits, etc).

Once you’ve established what it is you’re buying, you need to think about a whole range of other components that make up the sale:

  • Will you be taking over a lease or entering into a new lease? If so are you happy with the terms of that lease? Is the landlord happy with you?
  • Will you be taking over any contracts, equipment leases, etc? If so, can those be assigned to you?
  • Is there a licence (food, liquour, etc), a business name, a phone number, etc, to be transferred?
  • Are there staff? If so, will you be employing them all? Will the seller pay out any leave entitlements? Will the staff be happy with a new boss?
  • Will you have ongoing obligations to customers of the business (contracts, warranties, etc)?
  • Is the equipment and stock all in good repair and working order?

And the list goes on….

What’s hiding in the closet?

We spoke above about ‘baggage’. Any business that’s been around for a while will have some. You can minimise baggage by avoiding buying a company, but you need to do more than that.

With the introduction of the Personal Property Securities Act 2009, it has become increasingly important to check whether the business has any security interests registered that may impact your “good title.” A search of the register will reflect most creditors who have some claim to the business’ assets (other than land).

Additionally, you need to ask the seller to make a number of warranties as to the state of affairs of the business to make sure you’re not in for any surprises.

It’s also important to think carefully about how the goodwill is valued in the business. If the goodwill is mainly attached to the person, rather than the business you need to consider the value of your investment (ie, everyone went to “Molly’s House of Tea” because Molly is a delight and once she’s gone, people stop going because as nice as the new owner is, they just don’t have Molly’s knack).

At the very least you may need to insist on a restraint of trade, requiring that the seller doesn’t immediately set up a new, competing business, or start poaching your best clients or employees.

Who are you going into business with?

As is the case with most ventures, buying a business requires you to think carefully about with whom you’re entering the business. If you’re planning on working in conjunction with a business partner or partners then the relationship between you needs to be carefully recorded so that you each understand your roles, rights and obligations.

Similarly, make sure you have solid employment contracts, terms and conditions and/or customer contracts (where appropriate).

Don’t forget the intellectual property

Finally, it is important to remember that not everything is tangible. The business may have valuable intellectual property, from copyright and trade marks, to domain names and social media accounts, all of which you need to be in control of following your purchase. Don’t lose sight of the things you cannot touch…

When things get real

Remember that the sale is not binding until contracts are exchanged. Make sure that you move quickly as the seller may be negotiating with other potential buyers and if someone else beats you to the exchange of contracts, you can be gazumped with no recourse against the seller.

Here’s to your success

When all is said and done, the process of buying a business can be a profitable and exciting one. By taking some careful precautions, conducting those few extra checks and making sure you understand your rights and obligations you could find yourself with a very successful and enjoyable business for years to come.

That’s our passion at Snedden Hall & Gallop, it’s our business to make sure that things go smoothly in your business, so contact our Business Law team today if we can help in any way!