5 things to consider when buying a business

The main thing a business lawyer does when you are purchasing a business is to help you determine whether or not the business is actually worth purchasing. The commercial decision to buy a business is a complex one and a business lawyer can help make the purchase process easy. This is done by providing clear advice as to what you are purchasing and most importantly on the terms of the agreement. Whether it is a small business or larger entity the key elements remain the same.

Some business buyers are making quick decisions when you find a good business you’re interested in. It is wise to take the time to slow down and consider the advice and documentation carefully.

Commercial decisions such as a business purchase have many moving parts and if the agreement isn’t clear it can lead to disputes. It is different from starting a business as there are existing business assets, plants and equipment, intellectual property, the previous owner’s methodology, leases and contracts of the business already in place.

Our business lawyers have helped many clients purchase their first or multiple businesses. We see a cross section of business purchases from the initial negotiations right through to settlement. We even represent clients involved in business sale disputes resulting from misrepresentations or defaults. This experience means we can quickly advise business buyers so you can avoid the common issues and errors that are made.

Here are some 5 things you need to consider when buying a business according to our business lawyers:

1.Check the seller’s representations

There are many things to consider when determining if a business is worth purchasing.

First, you need to look at the financial statements of the company. You want to make sure that the numbers add up correctly and are not overstated. If they don’t add up, then you may have a problem. Checking what their business owner is saying they are doing in turnover may be disproved or proved through the financial reports, so check the details carefully.

If you don’t know how to read financial reports, then get some help from an accountant.

At this stage a business purchaser should look for evidence to substantiate the business sellers’ representations as cash flow and turnover. This will go a long way to determine the purchase price of the business.

2. Goodwill – what is it worth it and will it transfer to you?

You want to make sure that the company has a good reputation and brand name in the marketplace. If it has a declining reputation, you may find yourself having to spend money fixing the damage done to the brand name. You should look for how the customers are engaging with the company. Often Google reviews are a good indication of customers’ feedback on the company’s products or services.

If the goodwill is mostly associated with the business owner is selling you must ask if those customers will follow you. Are you going to offer the same product and service they are used to? Are customers loyal to the individual or the brand? It may not be the business owner, but key employees who have vital relationships with customers.

During this period of due diligence certain queries might come up and you may renegotiate the terms of the deal.

3. Employees

Managing employees during a time of transition can be difficult. If you are retaining existing employees, you will need to know as much as possible about the team. Keeping employees on after a sale can be crucial to the ongoing commercial viability of the business. Like customer employees may be loyal to the existing business owner and their way, so it is key to a smooth transition to think about engaging the key employees. It may be worth asking the seller to remain in the business as your employee or an independent contractor following the settlement.

A commercial lawyer will ensure that employment matters are considered in the business sale so that there is minimal post-settlement disruption.

4. Get the agreement documented correctly

Your letters of offer may need to be specific and comprehensive from the outset. A business lawyer can help you set out the offer.

The business sale contract will document what is transferred as part of the sale, so this needs to be carefully drafted. You want to ensure that at settlement you are getting everything you have negotiated. Your business purchase lawyer will ensure the contracts and other documents are drafted so that your interests are protected.

Not having the deal properly documented may mean that you miss out or disputes arise due to ambiguity or the parties are unclear as to what has been agreed. The only way to enforce your rights is by having the required legal documents in place. Proper documentation can deter one party from doing the wrong thing later, as there is a strong recourse for the other party.

Make sure that you have a written contract that outlines the terms of the sale and the responsibilities of both parties leading up to the settlement.

5. Settling the deal

Now that you’ve got all the paperwork in place, you’ll want to sit down with the owners of the business and navigate the final stages of the business sale. Even towards the end there may be negotiations and disputes that arise. A skilled and experienced commercial lawyer will help you through the final stages and help you work out solutions if issues come up.

Where a lot of money is at stake, you will need a business lawyer who is tough but can negotiate well.

There are also all the steps of the financial settlement to pay for the business that is arranged. Dealing with lenders requires a careful and professional approach as commercial lending is quite different. Commercial lenders having strict lending criteria and can be cautious about their exposure. These negotiations need maturity and experience on behalf of your lawyer and their legal team.

PCL Lawyers – Concise legal advice. Commercial understanding.

Our team at PCL Lawyers are experienced and have helped many business owners through a business purchase. We provide concise legal advice with commercial understanding. Buying an existing business is a process and we help business owners to achieve their commercial outcomes and grow their businesses.

Download our guide to buying a business here.

If you are buying a business, speak to one of our lawyers today for advice.

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