Buying an existing business can provide the opportunity to take over an established operation with existing customers, employees, systems and revenue. However, it can also involve significant financial and legal risks.
Before signing a contract or committing funds, it is important to understand what you are buying, what obligations you will take on and whether the business is suitable for you.
Here are some key matters to consider.
1. Understand the Business
Look beyond the financial figures and consider how the business actually operates.
You should consider its customer base, competitors, industry conditions and future prospects. It is also worth understanding why the current owner is selling and whether the business relies heavily on the owner’s personal relationships, knowledge or involvement.
A business that performs well under its current owner may not necessarily perform the same way after the sale.
2. Conduct Due Diligence
Due diligence allows you to investigate the business before becoming legally committed to the purchase.
Depending on the business, this may include reviewing:
- financial statements and tax records;
- major customers and suppliers;
- important contracts;
- assets and liabilities;
- employees and accrued entitlements;
- licences and permits;
- intellectual property;
- disputes and potential claims;
- insurance arrangements; and
- leases and property arrangements.
Your accountant can assist with the financial aspects, while your lawyer can investigate the legal arrangements and identify potential risks.
3. Know Exactly What You Are Buying
The sale agreement should clearly identify the assets and rights included in the purchase.
These may include equipment, stock, business names, intellectual property, websites and domain names, social media accounts, contracts and goodwill.
It is equally important to identify what is not included.
If stock is being purchased, consider how it will be valued and whether damaged, obsolete or unsaleable stock will be excluded.
4. Check the Premises and Lease
If the business operates from leased premises, the lease may be critical to the value and continued operation of the business.
Consider the remaining lease term, renewal options, rent and outgoings, rent reviews, permitted use, repair obligations and make-good requirements.
The lease may need to be transferred to you or a new lease negotiated with the landlord. Landlord consent may therefore need to be obtained before settlement.
5. Consider Employees
If employees will continue with the business, their existing arrangements should be reviewed before settlement.
This may include wages, accrued entitlements, length of service, awards or enterprise agreements and whether previous service will be recognised.
The purchaser and seller should understand their respective responsibilities before the transaction is completed.
6. Review Important Contracts and Intellectual Property
Important customer, supplier, distribution and service contracts should be identified and reviewed to determine whether they can be transferred to the purchaser.
Some contracts require consent before they can be assigned, while others may allow termination following a change in ownership.
You should also confirm ownership of important intellectual property, including trade marks, business names, software, websites, domain names, designs and confidential information.
7. Consider How the Business Will Be Purchased
There can be significant differences between buying the assets of a business and buying shares in the company that operates the business.
The structure can affect liabilities, taxation, employees, contracts and the assets being acquired.
The proposed structure should therefore be discussed with your legal and accounting advisers before the transaction is finalised.
8. Understand the Sale Agreement
The sale agreement should accurately reflect what has been agreed and clearly set out the parties’ rights and obligations.
Depending on the transaction, it may cover:
- purchase price and deposit;
- assets and stock;
- conditions before settlement;
- lease transfer;
- employees;
- contracts and intellectual property;
- seller warranties;
- restraints on competition;
- handover or training arrangements; and
- settlement requirements.
Obtain legal advice before signing, rather than waiting until after you are legally committed.
Before You Buy: A Quick Checklist
Before proceeding, make sure you understand:
☐ What you are actually acquiring ☐ The business’s financial position ☐ Any liabilities or legal risks ☐ The premises and lease ☐ Employee arrangements ☐ Important contracts and whether they can be transferred ☐ Ownership of intellectual property ☐ Relevant licences and permits ☐ How stock will be valued ☐ The proposed purchase structure ☐ Your obligations under the sale agreement
How Can Nevile & Co Assist?
Buying a business involves a range of commercial and legal considerations. Nevile & Co Commercial Lawyers can assist with legal due diligence, reviewing and negotiating sale agreements, leases, commercial contracts, intellectual property, employment arrangements and settlement.
Obtaining advice early can help identify potential issues and ensure the terms of the purchase properly reflect the agreement reached between the parties.
If you are considering purchasing a business, contact Nevile & Co Commercial Lawyers to discuss the proposed transaction.
