Buying a business is a big investment and the process can seem convoluted and confusing; even more so if you’ve never been in business before. Understanding the ins and outs of the process will provide the strongest foundation for your purchase, ensuring that what you buy is what you expected.
Advantages and disadvantages of buying a business
Prior to purchasing a business, it is important to weigh the advantages and disadvantages of buying a business. These may vary depending on the type of business you are buying and how well it is doing commercially.
Common advantages of buying a business include:
- The business is already established and has a client base and financial history, allowing you to know what you are dealing with
- Businesses will often have pre-existing staff who will enable a smooth transition for your takeover
- There is no period with minimal cash flow as the business is already running and presumably has been for a while
- You do not have to go through the start-up process which can be expensive and confusing in itself
Common disadvantages of buying a business include:
- Purchasing a business can be expensive upfront
- If the business is underperforming, it may be difficult and costly to make it profitable
- The business premises may be in a poorly accessible location
- Existing staff may not be up to your standards or have low morale
- You may need to purchase new equipment or move premises if these are in bad condition
Many of these disadvantages will be obvious when inspecting the business at first instance when conducting due diligence investigations and can often be negotiated in the contract.
One of the most important steps for you as the purchaser of the business will be conducting due diligence investigations. Due diligence is often conducted prior to the contract is signed but there may also be a special condition allowing for the purchaser to conduct due diligence prior to the contract going unconditional. In both cases, it is important to ensure that you conduct these investigations.
Due diligence is the most efficient method to investigate whether the purchase of the business will be in your best interests. Depending on your negotiations, it provides you access to confidential information which enables you to evaluate any risks you may incur after purchasing the business and whether the business is worth the value you are purchasing it for.
Such due diligence investigations may include but are not limited to reviewing:
- income statements and records of accounts;
- details about stock and equipment;
- intellectual-property assets;
- contracts with contractors, clients, and staff; and,
- credit and tax history.
The contract for Purchase
Businesses can often be purchased in two different ways which will be reflected in the type of contract you have. The two types of contracts are:
- purchase of assets in the business – this option is preferable where the assets of the business are encumbered. By purchasing only the assets of the business, you are able to determine and purchase only the assets that are unencumbered. This prevents you from any potential liabilities associated with the previous owner of the business.
- purchase of shares in the business – buying shares in a business means you will be purchasing all assets of the business which exposes you to any claims that someone may have against the business.
What are the common provisions included in a purchase contract for a business?
The terms of your contract will vary depending on your circumstances and the outcome of your negotiations with the seller. However, there are standard terms that are commonly found in these contracts, including:
- Purchase price
- What you are purchasing (e.g., assets only, or shares and assets)
- Payment method (e.g., by instalments, by loan, etc.)
- Restraint of trade (i.e., preventing the seller from opening up a similar business near the one you are purchasing)
It is important to seek legal advice when you have a contract to purchase a business as a qualified solicitor will be able to assist you in your negotiations with the seller. This will ensure your own interests are protected during and after the sale.
Apart from a greater awareness of the sales process, an expert business lawyer can help with two key components of the sale. Firstly, each document, from confidentiality agreements to the final contract, should be reviewed by a legal professional. This will ensure your rights are protected and you are aware of each clause as it pertains to the ongoing business’ operations.
The second benefit is legal due diligence. Some of the key points this encompasses are:
- Confirming legal ownership of assets
- Identifying past, present and pending lawsuits
- Examining existing contractual obligations
Ensure you understand what you’re purchasing before proceeding. Get straightforward advice from GLG Legal and avoid potential pitfalls when it comes to purchasing your next business.