Buying a Business

5 easy things to look out for before buying a business

There are a number of issues to be considered when buying a business

 

Analyse the seller’s objectives

 

Why does the seller of the business want to sell?

 

If you can uncover the seller’s motivations, you’ll gain an advantage in the negotiation process. For example, if the owner has to sell within a certain time period then you may be able to negotiate a lower price.

 

You may also uncover something about the business that you were not previously aware of. Is it perhaps too stressful for you to handle or not making as much money as you initially thought?

 

Sellers often pass over the weak areas of the business or create short-term gains to make the business appear better than how it normally performs. A common trick is to keep stock levels low in order to have a seemingly higher profit in their books. Ensure you investigate thoroughly before you show your interest in buying the business.

 

If there is a lease, it needs to be transferred to you from the previous business owner.

 

A lease is at the centre of the relationship between a landlord and a tenant of any commercial premises. Entering into a lease is a huge commitment. These contracts are often for 5 years and may run up to many years beyond that. You must carefully analyse the transfer clause and in most cases, you will need to seek the permission of the landlord before the lease is transferred to another party. As with many business deals, things do not always go to plan. As well as the payment of monthly rent, you need to understand your rights and responsibilities as a tenant or landlord under the Retail Leases Act.

 

You must carefully analyse the transfer clause and in most cases, you will need to seek the permission of the landlord before the lease is transferred to another party. As with many business deals, things do not always go to plan. As well as the payment of monthly rent, you need to understand your rights and responsibilities as a tenant or landlord under the Retail Leases Act.

 

If you have a shop listed here then under legislation you will be regulated by the Retail Leases Act. The Retail Leases Act appears to have been drafted with the intention of providing additional protection for tenants against landlords. Apart of this process includes the creation of obligations on the landlord to provide the tenant with more information than might otherwise be available to the tenant.

 

Check, double check, triple check what you are buying

 

Look at the businesses financial statements (for the last 5 years if possible) – such as cash flow statements, debts, annual turnover, and profit and loss statements.

 

Does the business have an efficient accounting system in place and does the owner monitor key performance indicators regularly?

 

Check the details of physical assets such as machinery, buildings, equipment, and stock. Also any other information such as the details of other assets such as goodwill towards the business and intellectual property (any designs or ideas that you have protected through copyright).

 

When was the last full audit? If it was over six months ago, ask for another one.
Every business has at least one intellectual property asset — its “brand” (or “trade mark”). When you are buying the business, you are also buying the IP of the business.

 

The trade mark is a major component of business goodwill and value. It should be protected more than any other asset that you are physically purchasing.

 

A common misconception is that a business or company name protects the brand of a business. Registering a business name is a legal obligation. You can get punished if you don’t do it, but there are no rights granted to you for doing it.

 

Only a trade mark gives enforceable rights in a brand name. A trade mark can stop someone else using a similar brand name, business name, company name, or domain name.

 

A registered trade mark also provides a defence to infringement of other registered trade marks. It is therefore both a sword and a shield.

 

What Legal Entity will be Owning the Business?

 

This may have an impact on your tax obligations if the business is run by an individual (sole trader), company, partnership or trust.

 

Sole trader

 

A sole trader is the simplest business structure. The structure is inexpensive to set up because there are few legal and tax formalities.

 

If you operate as a sole trader, you’re responsible for all aspects of the business, including any debts the business incurs.

 

Partnership

 

A partnership is two or more people or entities who do business as partners or receive income jointly.

 

In a partnership, control or management of the business is shared. A partnership is not a separate legal entity so you and your partners are liable for all debts and obligations of the business. A formal partnership agreement is common, but not essential.

 

Company

 

When you register a company, you are creating an entity that has its own legal obligations. As an officeholder, you need to be aware of anything that is required of you under the law.

 

Before starting a company, you also need to consider the structure of your company and how it will operate.

Due Dilligence

This is a checklist of a business undertaken by a potential purchaser. The checklist is used to establish the commercial potential and the assets & liabilities of the business.

 
For example you may be purchasing an electrical maintenance business which the owner says has a large number of contracted clients.

 

If so you need to have your lawyer check that those contracts are in place, and are not easily terminated. Your lawyer will also check to see if there are any precautions in place to stop the owner from taking your clients to another business once they have sold the existing business to you.


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I don’t trust words. I trust action.

Just try us. We guarantee you’ll know straight away.