Important Issues to Consider When Buying a Business
November 10, 2019 /

If you are planning on buying a business, whether it be a small coffee shop or a multi-million dollar construction business, there are a number of important factors that you need to take into consideration.

Some of the main issues to consider are:-

  1. Buying entity/structure

Before you sign a contract, you need to get good advice as to the proper structure for your business and the correct buying entity.

For instance, it would often be beneficial for you to establish a discretionary trust with a corporate trustee to buy the business.  This structure can have the benefit of asset protection for you as well as having tax benefits.

If the business is heavily reliant upon certain Intellectual Property (“IP”), such as a trademark or patent, you may want to establish a further separate entity which would own that asset so that it is protected from the other assets of the business. 

  1. Due diligence

It is of course always prudent to carry out extensive due diligence enquiries of the business.  Due diligence can cover a vast array of issues and you should seek the assistance of your solicitor and accountant or financial adviser in relation to the various due diligence enquiries which may be necessary.

Common due diligence investigations are:-

  • Business name – you need to ensure that any name that you are acquiring with the business is properly registered and owned by the party selling the business.
  • IP – again, you need to ensure that any IP is owned by the party selling the business and that you will be taking ownership of the IP upon settlement.
  • Figures – you will of course want to ensure that any figures provided to you by the seller are accurate and you should have your accountant and financial adviser carefully scrutinise these.
  • Regulatory requirements – it is crucial that you ensure that you will have all of the necessary licenses, permits and qualifications to enable you to lawfully operate the business.
  1. Lease

A major part of buying a business is dealing with the lease for the premises from which the business operates.  You will need to determine whether you will be taking an assignment of the existing lease or negotiating a new lease with the landlord.  In either case, you will need to obtain the agreement of the landlord and ensure that you are satisfied with the terms of the lease.

  1. Employees

Of course, the most important part of any business is the staff. You will need to determine which staff you wish to retain, and enter into appropriate agreements with them.

The issue of who pays accrued entitlements of the staff needs to be dealt with in the contract.  Generally, an adjustment is made in the buyer’s favour for a portion of accrued leave and long service leave entitlements. 

  1. Stock

Stock is a crucial component of some businesses, and not so important in other service-based businesses.  In any event, the contract will need to stipulate whether or not stock is included in the purchase price. If not, a maximum figure you will be required to pay in addition for stock should be included in the contract.  A stock-take would then need to be carried out prior to settlement. 

  1. Restraint

In buying the business, you will of course want to ensure that you are protected against the seller opening a similar competing business nearby, or going to work for a competitor.  It is therefore crucial that you include appropriate restraints on the seller in the contract. 

Restraints must be reasonable and carefully drafted, or they will be found to be unenforceable by a court. 

  1. GST

Generally with a business, you will be buying the business as a going concern, and therefore, GST will not be payable in addition to the purchase price.  You will of course need to meet the requirements of the “going concern” provisions in the GST legislation and in particular, your buying entity will need to be registered for GST.  There will be some cases where the purchase doesn’t qualify as a going concern, and accordingly it is important to get good advice in this regard. 

  1. Earnouts

In some businesses, you will want to ensure that the seller stays in the business for a period of time after settlement to ensure continuity and also to ensure that the purchase price is justified.  In these cases, you can require that the seller remain in the business for a fixed period of time and that a portion of the purchase price will be contingent upon certain sales or profits being achieved.

Every business is different and presents its own challenges. If you are going to pour your heart and soul as well as a substantial amount of money into a business, you need to give yourself every chance of succeeding. This means doing your homework before you buy!

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