5 things you should know about...Buying a Business
1. Why is the business for you?
This seems very basic, but you have to spend time being certain that this is the right business for you. How does it fit with your skills, lifestyle, values and goals? What do you bring to the business? How can you improve it? If you have an existing business, will the business fit with your current business? Will synergies offer greater profitability and opportunity? Take the time and think it through.
2. Is the price right?
How do you work out whether the price is right? A business is worth what someone is willing to pay for it. In determining whether a price is fair you can look at what similar businesses sell for and a number of valuation methods. Then consider how the business fits with your skills, goals etc, or your current business, and what you learn from your research – due diligence.
3. Do the research – Due Diligence/ finance/contracts, permits and licences
It’s up to you to make sure that you are buying what you think you are buying. You must undertake due diligence to minimise your risk and help understand the business to ensure a smooth transition.
Look carefully at every aspect of the business, in particular:
• Profitability- revenue and expenses
• Security of profitability and growth opportunities
• Assets- check them to ensure that they exist and their condition
• Important contracts such as leases, franchise, supply or distribution agreements
• Permits, licences, registrations or authorities needed are available
• Liabilities actual and contingent (those liabilities that haven’t surfaced yet)
• Customers, suppliers and other key relationships
• Business processes, intellectual property and business data
• Employees. Which employees are key to the business? Will they stay with the business?
• Risks and how they are being managed
Look at all aspects of the business carefully to evaluate the business. Understand the Strengths Weaknesses Opportunities and Threats and what you can add to the business. Do research on the sellers too. Why are they selling? Your accountants and lawyers will assist here.
If it’s a business being purchased for less than $350,000 the seller is required to produce a Disclosure Statement setting out important details in relation to the business. Make sure you receive it and read it carefully.
This of course needs to be done early in the process. You must find out if you can borrow the money (if necessary) and if you do, what the costs will be. You should add the finance costs into evaluating the financial viability of the business. You may also need the ongoing support of the bank for the business so discuss the business with your bank.
Important contracts such as leases, franchise, and supply or distribution agreements must be examined to ensure the terms are reasonable and they can be transferred. Ensure that permits, licences, business trading and domain names, registrations or authorities needed are available to run the business.
4. Negotiate key terms and purchase agreements
You might consider negotiating the key terms of the business early. This is usually done by a letter of intent, term sheet, and memorandum of understanding or heads of agreement. These will set out the key terms. However, it is important to make this conditional on further due diligence and agreeing on the final form of the documentation and the transaction.
Make sure the contract of purchase is prepared, or carefully examined, by your lawyer. These legal agreements ensure proper legal transfer, protect your interests and manage risk. There are many risks associated with buying a business. You can minimise many of those risks through a carefully prepared agreement. Get your lawyers and accountants involved one of the biggest mistakes we see if purchasers signing documents before they get assistance, they then can find themselves bound by terms that in hindsight are not fair.
5. Get the ownership structure right
Consider the current ownership structure of the business and the ownership structure you wish to operate under. You might need to incorporate your own company and set up a trust to acquire the business or you acquire the shares and/or units of a current company and/or unit trust. Think about your likely exit from the business too. (See: 5 Things you should know about… Structuring your Business.)
For more information please call David Carter at Carter Lawyers on 8646-3866 if you want further assistance in buying your business. The first call is free.
The information contained in 5 Things you should know about...Buying a Business is for your general information only and should not be relied upon as specific legal advice. You should consult your lawyer, accountant or other adviser to obtain advice to suit your needs.