There are several legal, financial and general business matters to consider before buying a business.
Buying a business can be a complex transaction. This article will outline the 3 most important stages before signing a contact which ensures a successful purchase.
Analysing businesses documents and information is key to a successful purchase and should be done before signing any contracts. Don’t do through with the purchase until you undertake adequate research so that you can understand the risks and opportunities. Here are a few key questions you want to find the answers to when conducting research:
are sales as good as the owner/s say?
is cash flow sustainable?
Are systems sound and documented?
Is there any problematic legal obligations or liabilities?
Is all necessary information, rights and assets comprised in the sale?
Will employees and customers react positively to the change over?
Do you understand the operation of and opportunities in the market/industry?
2. Review & understand the documentation
There are a lot of documents to gather, read and understand. Some of them are outlined below:
Current and past financial statements:
Profit and Loss Statement
List of debtor & creditors
Copies of any BAS’s lodged by the businessList of Assets
2. List of Assets
You should produce a list of all plant, equipment, assets and stock being sold with their current valuations, proof of ownership and any warranties or guarantees if applicable. How stock is valued and counted should be discussed and agreed on at settlement. Personal Property Securities Register needs to be checked for example, to ensure that security interests necessary for the business have been registered.
3. Contact details of customers & suppliers
Ensure a list of customers and suppliers contact details are given to you so that you can keep ongoing relationships.
If you are assuming liabilities for the employees then ask for a list of all employees and their;
Years of service
Any disciplinary issues
All important contracts necessary for the operation of the business eg. Lease of premises/equipment or franchisors disclosure statement, should be reviewed. Term, assignment, change of control and termination provisions in particular, need to be checked.
3. Detailing the documentation
The transaction needs to be documented with a legally binding contract.
Three things to consider within this process:
Get legal, financial and taxation advise on the structure of the transaction. Types of things that need to be considered here are; are you buying the assets of the business or the shares in the company that owns the assets? What amount of flexibility and control do you want to have?
The price of the purchase and when it is to be paid needs to be agreed on including an option of monthly or annual instalments. You may want to negotiate a portion of the price to be held back for a certain time period to ensure the information given by the sell is accurate and projections are achieved.
Legal Contract The contract for sale of business - documents the terms agreed to by the parties, including for example the rights of the parties if things go wrong or a non-competition provision which prevents the seller from creating a competing business after the sale.
Always consider engaging accounting and legal advisors to assist with documenting the transaction and avoiding legal or financial surprises to arise later down the track. We highlight the importance of professional help and how it makes the process of buying a business a lot easier, safe and smooth.
If you are thinking of buying a business and would like some advice please contact us at Peer Wealth.