5 important considerations when buying an existing business

Written by Catherine Micallef

Before you purchase an existing business, it is important to conduct a thorough due diligence and be aware of any liabilities you may be taking on.

Conduct due diligence

Due diligence is the analysis of the business that you intend on buying. It involves an inspection of the company’s operations, transactions and financial registers. Both the vendor and purchaser should conduct their own due diligence.

Generally, it is conducted after you have shown an interest in the business but prior to any agreements being signed. It can also take place once a contract is signed, if it is included as a special condition to the contract of sale.

As a purchaser, you should ask questions such as:

● What is included in the purchase price?

● What liabilities am I going to inherit by buying particular assets?

● What makes the business viable?

● Have I prepared a business plan and/or financial forecast?

● Is retaining key employees important for a successful takeover?

We recommend engaging an accountant and lawyer to assist with this process.

Section 52 Statement

Section 52 of the Estate Agents Act 1980 (“the Act”) requires a disclosure statement be provided to a purchaser when a small business is sold. A small business is defined by the Act as a business, the goodwill, plant, equipment and fittings of which are offered for sale or authorised to be sold at a total price not exceeding $200,000 or such offer price as is prescribed. The current prescribed price is $450,000.

An exemption to this requirement is in the event that a business being sold has a liquor licence that is being transferred as part of the sale, then a Section 52 statement is not required.

The consequences of failure to provide a s 52 statement, or of failing to state the required particulars or of inaccuracy in the statement are that the purchaser may, before taking possession, avoid the contract.

Check licences

Having the correct registrations, licences and permits is important for you to be able to continue to run your business. Check that the business’ licences, permits and approvals are current and transferable. You need to know whether these licences are part of the sale.

You may also find that you need to apply for a new licence to run the business.

Review contracts and liabilities

Make sure you obtain all the necessary legal documents from the vendor and ask a business lawyer to review them. This helps to evaluate the risks associated with the business and also confirm that the vendor owns the business and has the authority to sell.

Documents that you should ask for include:

● Business registration certificates;

● Leasing agreements;

● Employment agreements;

● Supplier and distribution agreements; and

● Client agreements.

These documents help to identify all present and future liabilities within the contract.

Knowing the extent of these liabilities can help you negotiate the price down or obtain indemnities, if necessary.

Staff handover

The business you are interested in buying may have key staff members that are important to its success.

Talk to the vendor about current employees and whether they intend to stay with or leave the business.

If you wish to offer any current employees employment, you will need to make a new offer of employment. This can be on the same terms of the vendor or on new terms. Ensure that all entitlements are adjusted at settlement in the purchasers favour to take into consideration annual leave, sick leave and long service leave.

When purchasing a business, understand the risks, the liabilities and the agreed terms of what is included in your purchase by conducting comprehensive due diligence. This assists in understanding the value of the business, its liabilities and how to approach the sale.

During the due diligence and negotiation stage, make sure you engage a business lawyer to assist you with reviewing the legal agreements. Should you require any further information in relation to purchasing or selling a business, please contact our office and our experienced solicitors will be happy to assist.