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Having the money is not enough when you plan on buying a business. Purchasing a business takes as much planning and considerations as starting your very own one. Legal documents and requirements, for instance, require you to be very keen and attentive because you would not want to miss anything.
Therefore, it is important to understand the key components of successfully buying a business. The three things you need to do are:
- The business’ due diligence
- Getting professional advice
- Documentation
As you read on, you are going to learn all about these three main components, how they can affect your business purchase and how to deal with them.
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Due Diligence
A due diligence process is asking legal and tax-related questions about the business you plan to purchase. Out of all the three, due diligence is the most important thing to consider. It aims to resolve any legal issues that you might encounter before, during and after buying the business. Legal issues can either make or break the purchase of the business.
Due diligence should be carried out before you sign a contract. Below are the list of possible enquiries you can raise before your purchase.
Legal
- Does the business have any outstanding legal obligations and liabilities?
- Is there any lease agreement that comes with the business? What are its terms and conditions and what will be your rights and obligations under the agreement?
- Are there any government requirements to be carried out, such as notices regarding water, sewage system and health?
- What is the business structure and what are your roles, responsibilities and obligations?
- What is the system of the business and where are the documents supporting it?
Tax
- Are there any pending tax obligations that must be resolved?
- What are the taxes you need to pay along with the purchase of the business?
- How much are the tax implications in relation to the capital gains after a year of the purchase?
- Should you plan to sell the business in the future, are you aware of the provisions related to capital gains tax law?
- If the business is a partnership or a corporation, how should the taxes work?
Purchase Agreement
- What assets, rights and information are included in the purchase?
- Will the employees remain in the business with the new owner?
- Will you have a trial period wherein you will be in total control of the sales, system and banking of the business?
- Does the agreement completely cover everything from the finances, records, licenses, rights, transfers and other related issues?
Price
- What is the value of the business you are trying to purchase?
- Did you consult an accountant for the business valuation?
- Is the price negotiable?
- Were there any other interested buyers?
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Professional Advice
Contracts and transaction issues in a business are covered by commercial litigation. To be able to successfully carry out due diligence in a business you are trying to purchase, getting professional advice is the best thing to do.
Professionals like commercial lawyer, commercial litigator and accountant are the key people to consult in this situation. They will help you with any legal, tax-related and contract agreement related to your purchase. In addition, they will ensure that you will get the best deal and favours as their client and the buyer of the business.
Documentation
You need to make sure that all documents are correct and complete. Review all the business’ documentations before and after your purchase. Some of the information that you need to review in the documentation are listed below.
- Financial statements, including:
- Balance sheets
- Assets and liabilities
- Statement of profit and loss
- Business activity statement
- Debtors and creditors of the business
- List of equipment, stocks and other properties included in the purchase
- Their respective values
- Proof of ownership, warranties and guarantees
- Registration to Personal Properties Security Register
- Business suppliers and customers
- Their information
- Your right to contact them to inform of the new business owner
- Assurance of ongoing relationship
- Employees
- List of the employees’ names and personal information
- Job descriptions
- Year of service
- Salaries
- Other benefits
- Important contracts
- Lease of the building and equipment
- Past client agreements
- Financier’s consent if assets were financed
- Disclosure agreement for franchisors if the business is a franchise
- Other obligations of the business such as sales reservation and future transactions
- Documents of the purchase
What Are Other Legal Issues You May Experience When Purchasing a Business?
Imagine the worst case scenario that may happen during your purchase of a business. In that way, you can take time to find solutions to these possible occurrences even before they happen. Consult your commercial litigator to discuss solutions for these situations.
Most of the problems that you may encounter are disputes between two or more parties. Some examples of this are:
- Debtor and creditor disputes, including recovery of fees and commissions
- Disputes in regard to loans, mortgages, guarantees and financial contracts
- All forms of contract disputes
- All forms of business disputes, including partnership disputes, shareholder disputes and board disputes
- Joint venture disputes
- Commercial and retail leases disputes (whether for landlord or tenant)
- Disputes arising from contracts for the sale and purchase of residential and commercial property (whether for vendor or purchaser)
- Disputes arising from options to purchase land.
Key Takeaway
In order to successfully purchase a business, you need to fully understand everything about the business that you are trying to buy. Conduct due diligence and review all necessary documentations with the help of experienced professionals related to business, purchase and valuation. Lastly, consider and resolve all legal issues and disputes that may arise before completely closing the deal and signing the contract.