So you have found a business and you have your heart set on buying it. Congratulations that’s great news!
However, before you rush off to hand over the purchase price there are some important things to consider.
Is this business right for you?
Not everyone is cut out to be a business owner.
Running a business can be stressful and is not always as financially rewarding as you might think. On the other hand, some people thrive being the one calling the shots.
Decide if this is the right business for you and then if the answer is a resounding “YES” proceed carefully and with your eyes wide open about the potential pitfalls that buying a business can involve.
Do your due diligence
When you buy a business it is very much a case of “Buyer Beware” so it is essential that you carry out careful due diligence before entering into an agreement to purchase a business. It is very important that you have a clear understanding of exactly what you are getting (and sometimes not getting) before you hand over any money.
Above all, it is essential that you verify (as far as possible with the information available to you) any claims the vendor is making about the business are true.
Due diligence varies depending on the type of business involved, but as a general guide may include:
- Is the income from the business is as high as the vendor claims it is?
- If the current owner works in the business, do they pay themselves a market salary? If not, speak to your accountant about an appropriate "add-back" as it will likely affect the valuation.
- What is the value of equipment and any stock that comes with the business?
- Are there any registered charges over business assets that need to be discharged? For more information on this, see our article on the Personal Property Securities Register.
- What systems are in place to ensure continuity if essential staff leave?
- Is there a comprehensive business plan in place?
- Is the premises leased? Does the lease need to be assigned? How long is left on the lease? Are there any options to extend?
Instruct someone with appropriate expertise and qualifications to carefully review the accounts and financial records kept by the firm especially if the current owner is making promises that the business is more profitable than it looks on paper.
If the business you are purchasing is part of a franchise chain then additional due diligence may be needed.
Consider employee entitlements
An important part of any due diligence process is ascertaining any employee entitlements that may run with the business.
If employees are going to transfer to you as the new owner of the business then it is essential that you work out with the old owner who will be responsible for any accrued entitlements and which obligations will transfer to you as the new owner.
Some questions to consider:
- Will you be buying the business with staff who will come across to you as their new employer? If so, what entitlements do those employees currently have in terms of annual leave and long service and any other leave?
- Has provision been made in the contract for sale to factor in the cost of any accrued benefits and deduct that cost from the final settlement or will those benefits be paid out by the current owner to the employees prior to the sale being finalised?
- Are there any employees currently on Workers Compensation benefits or on extended sick leave?
- If there are employees on extended sick leave, is it work-related?
- Does the business have a good track record for safety or high workers compensation insurance premiums because of a past history of workplace accidents and claims?
- What enterprise or other agreements govern the workers employed by the business?
Get professional advice early
Very sensibly, most people do not buy a house without getting a builder to check that the house is not about to fall down.
Buying a business is no different and mistakes can potentially be even more costly.
It is unlikely that you will be able to think of every possible potential pitfall. The time to ask for advice is
before you sign a contract. If you seek legal advice early it could save you not just money but also a great deal of stress.
If you or someone you know wants more information or needs help or advice, please
contact us.
