In brief - Conduct your due diligence properly and get professional advice
You should perform a thorough analysis of all aspects of the business and get advice from a lawyer and an accountant prior to signing any contract to safeguard your interests and avoid costly mistakes.
Before you take that giant leap and purchase a business, here are six things that you should consider.
1. Performing due diligence properly will show you the true value of the business
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. Is there a lease on the premises? If so, can it be transferred?
You need to determine whether a premises lease is in place and if so, identify the conditions under the lease. These are imperative steps 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. What happens to the current employees of the business and their entitlements?
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 for making the business more successful
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.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2022.