Buying a business – some handy hints!

So you have found a business and you have your heart set on buying it. Or maybe you work for a business that looks like it is being sold. Congratulations that’s great news! However, before you rush off to hand over the purchase price or greet the new owner of the business you need to be aware of some important steps to consider.

Step 1 – Is this business right for you?

Not everyone is cut out to be the boss and running a business can be stressful and not always as financially rewarding as you might expect. On the other hand some people thrive in 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.

Step 2 – 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 investigate whether all the 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 checking whether the income from the business is as high as the vendor claims it is, the value of equipment and any stock that comes with the business and evaluating the risks involved in the running of the business.

Another issue to investigate is whether the premises where the business is located are leased or owned outright. If the premises are leased you need to obtain a copy of the lease to be sure that you will be able to continue to run the business from the same premises and to find out how long is left on the lease.

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.

Step 2 – What workers’ entitlements may be affected by the sale?

An important part of any due diligence process is ascertaining any employee entitlements that may run with the business. Some questions to ask are:

  • Will you be buying the business with staff who will come across to you as their new employer? If the answer to this question is ‘yes’, 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? For example, because of a stress claim
  • What is the Workers Compensation history of the business like? Does the business have a good track record for safety or high insurance premiums because of a past history of multiple workplace accidents and claims?
  • What enterprise or other agreements govern the workers employed by 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.

What you don’t want to do is unwittingly buy a business that has large accrued employee entitlements that you become liable for the day you take over the business unless the cost of those entitlements has been deducted from the agreed purchase price.

If you are an employee, particularly one who has been injured at work and may be on extended leave of some kind, then you may also want to ask these questions before the business is sold to ensure that the sale does not impact on any existing entitlements you may have.

Step 3 – Get independent professional advice

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 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 and hand over the money. If you seek legal advice early it could save you not just money but also a great deal of stress.

Similarly, if you are concerned that the business you work for is being sold and you may be adversely affected it is far better to obtain professional advice than to adopt a “wait and see” approach and then find out when it is too late that the business has been sold to someone who has no intention or capacity to honour your accrued entitlements.

If you or someone you know wants more information or needs help or advice, please contact us on (08) 9380 9288 or email mark@dclawyers.com.au or guy@dclawyers.com.au.