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Legal Considerations before buying a business

Legal Considerations before buying a business

Thinking about buying a business? You’ll need to conduct ‘due diligence’ before signing anything, as this is the best way to get an in-depth understanding of the business strengths and weaknesses. Is it financially viable? What does the purchase include? Does the business have any debts that I will inherit? These are important questions that a thorough due diligence would go some way in answering. Along with assessing the finances of the business, such as its revenue, profit, projected earning and growth targets, you’ll want to know as much as possible about any valuable contractual relationships, i.e. with suppliers, major clients, etc. It’s worth speaking to a lawyer and a financial adviser to help you understand the long and short-term potential of the business, and ultimately get as much value as you can for whatever you end up paying for the business.

Upon valuing your business, your business lawyer will take many factors into account. Some parts of the business are going to be valued more highly than others. Take, for instance, a café business. Sure, you can replace a broken coffee machine, but you’ll have more trouble replacing the beans that the customers have come to enjoy. Or perhaps the value is in the barista that has been managing for three years and has become a friend to the locals who frequently visit the café. Will he or she be part of the sale? Will you lose customers if the beans and barista change? Absolutely! For this reason, it’s important to determine what elements of the business should remain and which should change.

Getting value for money
By conducting a thorough due diligence over the business, you’ll uncover any financial failings or legal hurdles. It is very normal practice to have a business lawyer assist in drafting the Sale of Business Contract to ensure it is subject to due diligence. In this time, you will be permitted to conduct a thorough inspection of all the elements of the business. Once you know all there is to know about the business, you can decide what aspects to negotiate, or whether to negotiate at all! In other words, you’re not locked into any contract and can walk away.

Of course, understanding every single detail of a business might not be possible, but with the assistance of an experienced lawyer you should at least be able to get a better about he following aspects of the business:
Intellectual Property – A business’ intellectual property will typically be its most valuable assets. This is due to the fact that people will identify a business by its brand; they will associate the quality of the service and the product by the brand, particularly for franchise businesses. Positive brand recognition results in strong goodwill, which means a more valuable business. Have your business lawyer confirm the owner of the intellectual property that the business is using, and whether, if owned by the seller, it will form part of the sale.
Site, Lease – Where you operate might be a deciding factor in buying the business. Is the location critical to its success? Is it well positioned for its target market? What are the lease conditions currently in place? Is the lease coming to an end, or is it just beginning? Can you negotiate new terms with the lessor, or move to a new location altogether? Importantly, is the lease appropriate for the business, i.e. will there be any legal concerns with running this type of business from this particular site? This is where your business lawyer comes in, as he or she can advise on the different ways the premises can be used under the terms of the lease.
Approvals, Licences and Permits – The types of licences, permits and approvals you will need to lawfully operate the business will vary depending on the industry and state within which the business operates. In buying the business, you and your lawyer will need to enquire about the various permits, licences and approvals each government body requires. Will these permits, licences and approvals form part of the sale? Have your lawyer confirm these details in the terms of the contract.
Customer base – How is revenue being generated? You’ll need to know this, as customer retention might prove vital to your commercial survival. Have your lawyer look over all of the Client Agreements to make sure there are no issues that need to be resolved in order to keep your big clients smiling and coming back for more.
Existing employees – Relying on one or two key employees can be risky, however, many businesses operates this way. If the business you’re considering buying only has one or two employees without whom the business could not survive, you might need to negotiate the transfer of these employees. Look over their employment agreements. Are they fair? Is their remuneration adequate? If you cannot negotiate their transfer, work out a way of getting as much information from them as possible as part of the agreement.
Supply Contracts – Similarly, Supply Agreements might be the most valuable aspect of the business. Again, check whether or not they are transferrable as part of the sale. If they aren’t, negotiate with the seller to avoid losing the suppliers altogether.

At the end of the day, after conducting your due diligence, reassess the value of the business and decide whether or not the asking price needs to be adjusted. If there is no room for negotiation, or you simply have lost faith in the financial prospects of the business, you can rely on the due diligence clause to abandon negotiations altogether.

For more information about buying a business, contact LegalVision on 1300 544 755. Our business lawyers will provide assistance at every step of the way so that you get the best value for money.

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