There are an enormous amount of risks when buying a new business.  See LegalVision’s tips for buying a business and consider getting online legal advice.

How will I be buying the business?

This might seem like a silly question but there are actually two ways – (1) buying the assets or (2) buying the equity. Buying the assets:  A more complex method designed to minimise liability and tax exposure – this method involves transferring each asset individually to the new owner.  If the assets were owned by a company then the seller would still own the shares in the company, but all the assets owned by the company would be transferred to the purchaser. Buying the equity:  Is when you buy the shares in a company, which means you own the company and everything it owns.

Assets

Regardless of which purchase-method you use, you need to get a full assets list from the prospective seller.  Also get a depreciation schedule to see when the equipment is expected to run down.  Obviously the latter is important to see when costs will arise if you proceed with the purchase.

Staff

You should have a long conversation with the prospective seller about their staff.  You are under no obligation to employ them, so you need to think carefully about whether or not they are right for your business.  Also ask yourself whether there is an appropriate number of staff members.

What legal documents will I need?

You will certainly need copies of documents evidencing ownership of assets, insurance policies, employment contracts, commercial leases, distributor agreements and contracts with customers/suppliers.

Make sure you carefully examine the sales records

Just looking at the financial statements, in particular the balance sheet and profit and loss statement, can be misleading – you should get copies of the business’s sales records as well.  This enables you to see the strengths and weaknesses of the business.  You can see which products sell the best and what time of year tends to be the busiest.

Legal Due Diligence

Undertaking legal diligence is essential to make sure the new business will run smoothly and you fully understand what you are buying.  Legal due diligence helps ensure that the business is complying with laws and helps reduce your future liability risk.  A business lawyer will look over all relevant contracts and to ensure you will not get caught in any hidden legal pitfalls.

What regulatory hurdles do I need to jump?

Purchasing a new business could involve some kind of regulatory issue – most likely in the form of licences or permits (e.g. a liquor licence).  However, the ACCC might also impose some conditions which you will need to consider, particularly if the relevant business is a large business and there are competition issues.

What type of agreement should I enter into?

There are five basic types of agreement you should consider when are buying a business (1) Letter of Intent, (2) Terms Sheet, (3) Memorandum of Understanding, (4) Confidentiality Agreement and (5) Sale of Business Agreement (or Asset Sale Agreement or Share Sale Agreement). Letter of Intent:  Outlines intent to form an agreement before an agreement takes place. Terms Sheet:  Terms sheet is an agreement which outlines what would be the terms and conditions of a binding agreement.  It may be binding or non-binding, but this should be specified in the document. Memorandum of Understanding:  A memorandum of understanding indicates both parties have an in-principle agreement, but that this agreement is not legally binding. Confidentiality Agreement:  A confidentiality agreement binds parties to non-disclosure of certain information throughout the negotiation and sale process. Sale of Business Agreement:  A sale of business agreement is a vital document which sets out the terms and conditions of the sale.  You should strongly consider getting a contract lawyer or online legal advice to protect your rights and interests when buying a business. You do not necessarily need to enter into all the above documents.  In many cases only the last document is required, but in some cases a terms sheet is signed after initial discussions have taken place as a sign that each party is committed to reach agreement, to set out a basic outline of what has been agreed and so it is clear that everyone is on the same page.

Lachlan McKnight

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