Buying an already established business is a significant step and can be daunting. In this article we provide some tips on the steps you should take before you sign on the dotted line.

1. Know what you are buying

The value of a business often depends on the assets that are being purchased.  So, make sure you know what the assets of the business are and how much they are worth.  When you consider the assets remember to look at some of the less obvious assets like customer databases, operating manuals, trademarks, and designs.  Make sure that you are buying those successful systems and intellectual property of the business as well as other assets like any machinery, stock and office equipment.

2. “Due Diligence”

Of course, the seller (called the vendor) wants to make the business sound as good as possible, so it’s a good idea to make your own inquiries and dig deeper to satisfy yourself that what you are hoping to buy is up to the mark. For example, we recommend that you:

  • Try and get access to the business’ key customers and suppliers to find out what their views are about the business, and their future plans. Check what the terms of existing contracts are and find out what contracts will be signed over to you and what contracts you might have to renegotiate.
  • Complete a legal due diligence. Are the assets of the business legally owned by the vendors? Are there any pending legal disputes? Are the contracts in order? What liabilities could the business face in the future?
  • Remember to work with your accountant too – they will be able to provide advice on the financial position of the business and its long term viability.

3. What about existing employees?

Employees are key to the success of a business.  You should consider whether you will take on all or some of the existing employees, and if so, on what terms.  Negotiating to talk to key employees about their future plans makes sense.  The Agreement for sale and purchase needs to set out whether you (the purchaser) are going to be responsible for outstanding leave entitlements of employees and if so, how that will be dealt with on settlement.

4. Make sure you know what is happening with the business premises

If the business premises are leased check the terms of the lease, including the rent, how long is left on the lease and whether there are any remaining rights of renewal.  The last thing you want is to purchase a business and then have to move premises a few months down the track or be hit with an unexpected rent increase!

5. Terms of the contract

Common terms of an Agreement for Sale and Purchase of a Business include:

  • The total purchase price – this includes tangible and intangible assets and stock in trade.
  • Deposit – There is also usually a provision for a deposit to be made, which is often a percentage of the total purchase price to be paid when the contract is signed.
  • Vendor’s warranties – often the vendor will provide a warranty about the turnover of the business.  This is important because turnover is a big element in profit and purchasers often rely on how much profit the business makes when purchasing the business.  It is also usual for the vendor to warrant that until the purchaser takes possession of the business, the vendor will properly carry on and conserve the business and use all reasonable endeavours to maintain the turnover and preserve the goodwill of the business.  The vendor will be liable for indemnifying (or responsible for meeting the costs) the purchaser for any loss incurred by the purchaser as a result of breach of warranties.
  • Vendor’s assistance – will the vendor provide assistance to the purchaser after settlement?  For example, do you want the vendor to take you through the key business systems, introduce you to the key clients, and/or provide some other training?  If so, how long do you want the vendor to assist and on what terms?
  • Restraint of trade – will the vendor be prevented from carrying on another business in competition with the business you are buying?  It is also a good idea to restrict the vendor being able to solicit the customers and employees of the business you are buying for a reasonable period of time.
  • Finance – do you need to make the contract conditional on receiving finance to complete the purchase?  If so, make sure you include a finance condition, otherwise you will have to front up with the money even if the bank turns down your finance application.  Remember – once you sign on the dotted line, you are bound by the terms of the contract, so make sure you get your lawyer to read the contract, and advise you fully on it, before you sign it.

There is much to think about when buying a business – the above tips combined with helpful expert advice will go a long way towards helping you buy wisely and minimise any nasty surprises.