Buying a business can be an exciting time. It can signify a new challenge and a new opportunity for career development. On the other hand, the business purchase process can be tricky to navigate and it can be hard to know what to look for. If you are seriously considering purchasing a business, you should always do your legal and financial due diligence. This article will cover some key questions to ask yourself when looking to buy a business.
What Am I Buying?
When investigating a potential business, the most important part is asking yourself what assets are essential to run that business and, therefore, should form part of the sale. Key assets could include:
- intellectual property, such as trade marks, branding, business name, websites and social media accounts; and
- plant and equipment, such as machinery and other equipment involved in running the business.
Is the Purchase Price Reasonable?
The purchase price is largely a financial and commercial consideration. The seller usually calculates it with reference to the:
- value of the tangible assets (such as the stock and plant and equipment); and
- goodwill. A business’ goodwill speaks to its reputation, brand identity, customer base, location and skills required to run it.
When performing due diligence, you should make enquiries into how they have calculated the purchase price. Likewise, ask the owners for the business’ financial records, profit and loss statements, and other relevant documents. You should then take this information to your accountant or another financial professional who can assist with determining whether the purchase price is reasonable.
Continue reading this article below the formAre There Any Key Contracts Needed to Run the Business?
As part of your investigations, you should ask for a list of key contracts to which the business is a party. These are agreements that are important for running the business. As such, you will need to ensure they are assigned to you as part of the transaction. Amongst other contracts, you will likely need to check for any:
- commercial/retail leases. If the business is on a premise, a lease is likely involved. If so, you will need to obtain landlord approval before the seller can transfer the lease to you;
- equipment leases. If a business rents any of its equipment, these leases will need to be assigned to you should you wish to continue using that equipment. Often the owner of the equipment will have also taken security over the asset as part of the leasing arrangement, so it is critical you check this too; and
- supply agreements. If the business has any key supplier relationships that you wish to maintain, you must have discussions with them to ensure they consent to you taking over that contract.
It may be the case that the other party will wish to start a fresh agreement with you once you take over the business. If this is the case, it is essential that you review this agreement before signing.
What is the Employee Situation?
Additionally, investigate whether the business has staff. If so, are you planning to keep any after purchasing the business? You should ask the owner for a list of current employees, as well as their:
- type of employment (casual or permanent);
- role;
- salary and entitlements; and
- employment agreement.
If you wish to take on any of the employees, you will need to negotiate with the seller as to who will be responsible for any entitlements those employees have accrued to date. Notably, you do not have any obligations to recognise prior entitlements. However, employees may prefer to keep any leave entitlements they may have accrued rather than receive payment from their previous employer. Regardless of your approach, you will need to issue any employees you keep on with new employment agreements.
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
Key Takeaways
Buying a business can feel overwhelming, and often it can be difficult to know where to start with your due diligence. As part of your investigations, you should ask the seller for information about the business’ key assets, staff, contracts and financial position. Following this, touch base with your legal and financial professionals for advice on what you discover. From there, you can formulate a holistic opinion on whether you want to proceed with the purchase.
If you need more information to guide you when purchasing a business, our experienced business purchase lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Each transaction is different, but you should be inquiring about the business’ assets and their ownership. You should also check for key contracts needed to run the business and whether there are any employees.
You should always ask the owner for the business’ financial statements and have these examined by your accountant or financial advisor. They will be able to assess whether the asking price is reasonable and whether the business is viable.
If you want to retain any staff as part of the purchase, you will need to provide them with new employment agreements. You will also need to negotiate whether you or the seller will be responsible for the employees’ entitlements (such as accrued leave).
We appreciate your feedback – your submission has been successfully received.
