Here is a short list of some things we recommend you be aware of when you are buying a manufacturing business.

Suppliers

Maintaining levels of core supplies is an absolute necessity for any manufacturing business. Accordingly, it is important that when buying a manufacturing business, that the sale includes a term whereby any supply agreements capable of transfer are transferred to the purchaser, and the vendor has a positive obligation to introduce the purchaser to any key suppliers. Our small business lawyers are specialists in drafting supply contracts and would be glad to assist you.

Stock and equipment

Most manufacturing businesses would have a level of pre-existing stock or supplies. In a sale of business contract, stock can be sold either as part of the purchase price or an additional amount paid. In either case, we recommend that the contract provides for a pre-completion stocktake to be undertaken, so that you have certainty as to what exactly you are buying. A stocktake is generally taken a few days before settlement and depending upon the amount of stock that is going to be transferred, it may be a good idea to appoint an independent valuer.

Equipment is generally incorporated as part of the sale price. In manufacturing companies however, there may be hire agreements entered into for some of the equipment due to their speciality or cost. Accordingly, instead of being transferred the item itself, you may wish to become a party to the relevant hire agreement.

To know exactly what you’re buying as part of the purchase price, always include, as part of the contract, a precise list of all equipment that is going to be transferred, including details of any equipment that is under hire. This way you will be able to enter into new hire agreement and not be stuck without certain equipment, or thinking you own something you actually don’t. Finally, always run a check on the quality and functionality of equipment. This will allow you to identify any equipment that may need to be repaired before the sale is settled. Here, we recommend a special condition be included entitling the vendor to conduct a pre-settlement inspection of the equipment, and an adjustment to be made for the value of any necessary repairs or replacement costs.

Customers

Businesses generally make money from repeat customers. As a result if there are a number of existing customers, similar to suppliers, the contract should state that the seller should introduce you to the existing customers before settlement or otherwise provide a database of their details. In some cases, the customers will also have pre-existing contracts and you may  be required to honour them. Accordingly, the seller should be placed under a positive obligation to disclose to you any existing contracts, and you should have an opportunity to review them before completion.

Lease

When buying a manufacturing business, the premise from which you will be manufacturing your goods will need to have a valid lease. Ensure that the lease runs for long enough so that you will be able to gain a profit (moving can be very expensive). In addition, any sale should always be conditional upon the transfer of the lease.  The completion of the sale should not take place unless the lease is first finalised, or finalised with the sale. As small business lawyers, we will be able to renegotiate any lease for you and may be able to negotiate a rent-free period.

Employees

Most sales of manufacturing business will include a term whereby any existing employment contracts are transferred to the purchaser. You should have the seller introduce you to the employees before settlement and make sure that you and the seller are clear on what happens to any existing employee benefits upon settlement. We recommend that the seller pay this out and allow you to start fresh.

Conclusion

Buying a manufacturing business can be both challenging and exciting at the same time, but its important the documentation protect your rights and clearly establish your responsibilities. If you have any questions or want any additional help, contact LegalVision on 1300 544 755 and we’ll get one of our experienced small business lawyers to help.

Emma Jervis

Next Steps

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