Asking the right questions can make all the difference
Commercial Lawyer Michael Smith advises on many business purchases and sales each year. In this helpful summary, he identifies some of the key issues prospective purchasers should keep in mind before signing up to a potential deal.
The opportunity to buy a business can be both exciting and stressful. If done well, the astute business purchaser can achieve great success. However the decision to buy a business holds a number of risks. Below are just some risks which should be considered, from both a legal and practical perspective, before you make a final decision:
Why is the Vendor selling? Are they retiring, moving on to a new venture or do they foresee a downturn in the market and want to get out now? Is there something untoward that you need to be on guard about?
Structure of the deal
Will you be buying shares in an existing company, or just the assets of the business? Buying shares is generally simpler, avoiding the need to transfer each business asset, however it also carries more risks as you will be responsible for all of the actions of the company, including those which occurred before you owned it.
Having your accountant review the accounts will enable you to determine the likely fixed and variable costs of the business, helping predict future profits. You can also see if there are any sales patterns or irregularities which may be of concern.
Particularly for a retail business, location can be make or break. Are there any recent or future changes in the local area which might have an impact on profitability? Are there any planned construction works in the immediate vicinity that may significantly deter new business?
What are the terms of the lease of the premises? How much rent will you be paying, will it increase, how long is left on the lease and do you have an option to renew it? These can all significantly affect profitability.
Are any employees (or the Vendor) vital to the running of the business? If so, will they remain once you take over? Might you structure part of the purchase price as being payable on performance post-purchase, so as to ensure continuity and protect client and referral relationships?
Who owns the equipment used to run the business? Is it subject to any leasing arrangement? Is the equipment in good working order?
Are there any securities registered over the business or the vendor? Will these be released prior to completion?
While duty on business purchases is set to be abolished from 1 July 2016, issues like GST, CGT and income tax remain relevant. Your accountant and lawyer can assist in this regard.
You should always ensure that the vendor is restrained from competing with you for a set period of time. What will be appropriate will change from business to business, however, at a minimum the restraint time should be sufficient for you to realise return on your investment, meaning that the vendor will be precluded from setting up a competing business, or referring customers to another business in the same industry for a set period.
Make sure there is full disclosure of present and contingent liabilities of the business. To the extent that you are concerned about continuing historical liabilities, you may wish to consider acquiring only the assets and not the liabilities of the business.
Special care should be taken in reviewing the sale agreement. It should cover all of the matters agreed between the parties and include appropriate warranties and guaranties by the Vendor. Do not rely on verbal promises – ensure that everything that is an important consideration in buying the business is reflected in the agreement.
Naturally, each business will have its own peculiarities to be taken into account, beyond those listed above. It is always advisable to include your accountant, business advisor and lawyer as early as possible in the process to help minimise your risk.