Buying a business can be an exciting opportunity - the chance to be your own boss, do work you enjoy and build something successful.
However, buying an established business also involves financial, commercial and legal risks. Failing to properly investigate what you are purchasing can create problems long after the transaction is complete.
If you are considering buying a small business, here are five common mistakes to avoid.
1. Failing to Conduct Proper Due Diligence
Due diligence is one of the most important steps when buying a business.
Before proceeding with the purchase, review the business's financial statements, sales records and relevant contracts with customers, suppliers and employees.
You should also investigate the intellectual property associated with the business and determine whether there are any existing or pending legal disputes or other legal issues.
Thorough due diligence can help identify potential risks before you become responsible for them.
2. Not Fully Understanding What You Are Buying
A business purchase involves much more than acquiring its name and physical assets.
Buyers should understand exactly what is included in the transaction, including:
- business assets;
- existing contracts;
- liabilities;
- intellectual property;
- equipment; and
- potential tax considerations.
Understanding the scope of the transaction before signing can help prevent unexpected liabilities or disputes later.
3. Failing to Review the Legal Documents
Contracts can determine many of your rights and obligations after purchasing a business.
Review agreements with customers and suppliers, employment contracts and documents relating to the business premises.
If the business operates from leased premises, consider important provisions such as rent, renewal options and maintenance obligations.
You should also identify documents relating to intellectual property, including trademarks, patents and copyright where relevant.
Understanding these documents is an important part of assessing the legal position of the business before completing the purchase.
4. Assuming There Is Automatically a Trial Period
In Queensland, a trial period must be agreed upon beforehand and included in the contract of sale – it is not automatic.
Where a trial period has been agreed, it provides an opportunity to examine the operation of the business, its financial performance and its viability.
It can also help you assess whether representations made by the seller about the business are accurate.
The terms of any proposed trial period should therefore be considered carefully before entering into the contract.
5. Failing to Seek Legal Advice Before Buying a Business
Buying a business is a complex commercial transaction involving numerous legal and financial considerations.
Obtaining legal advice before committing to the transaction can help you understand the contract, identify potential liabilities and address issues before they become expensive problems.
A commercial lawyer can also assist with reviewing and negotiating the sale contract and ensuring the transaction accurately reflects what you have agreed to purchase.
Preparing to Buy a Business?
Whether you are buying a business for the first time or regularly undertake business transactions, careful preparation can significantly reduce unnecessary risk.
The team at GLG Legal can assist with due diligence, business sale agreements, commercial contracts and other legal considerations involved in buying a business.
To discuss your proposed business purchase, contact GLG Legal on (07) 3161 9555 or email info@glglegal.com.au to arrange an appointment.