There are a lot of considerations that go into purchasing a business. If you have never purchased a business before then navigating the legal and accounting landscape of a business transaction may be unfamiliar territory. This article provides a brief rundown on a number of common things you should be mindful of when purchasing a business.
What are you buying?
Buying a business differs quite substantially to simply purchasing a property. When buying a business you will often be acquiring numerous different types of assets that may include equipment, vehicles, stock-in-trade, goodwill (the inherent value of the business), intellectual property and often even the premises itself.
It is imperative when purchasing a business that you have a clear idea of what is included in the contract price and how the purchase price has been divided among the various different assets. Not only will this give you certainty over what is yours come settlement day, it might save you thousands or even tens of thousands of dollars in GST or capital gains tax in the future.
What aren’t you buying?
It is common for a business to be run out of a leased premises. Often this means that you will need to acquire the lease associated with the business or you might be left holding the rights to a business but with nowhere to run it from.
Most leases require the consent of the landlord before they may be transferred to a new tenant and the landlord will want to see some financial evidence that you will be able to continue to make the rental payments. In most cases they will also require some sort of bond and, depending on the landlord, may require other securities as well.
You will want to ensure that the lease contains sufficient clauses to renew. After all, you don’t want to grow the business for two years only to find out that your lease is up and it’s time to move out.
You will also need to clarify your and the landlord’s obligations that apply both during the term of the lease and once it ends. These obligations are often a surprise to new business owners, who might seek to move onto larger premises only to find out that they are required to fund thousands of dollars of work to restore the premises to a different condition prior to leaving.
Leases are complex documents. To touch on every aspect of a lease is beyond the scope of this article, but this is where the role of a legal advisor will be invaluable to you.
It is not at all uncommon for managerial staff to be key players in the business. Often they’ll be worth their weight in gold and this is particularly so where you are acquiring a business in an industry where your previous expertise is limited. If there are important staff members that you wish to retain, you should open the lines of communication between yourself and those individuals at the earliest opportunity.
It is also necessary to be aware that you may acquire obligations for unpaid leave entitlements and long service leave if they continue to work for you. This is often accounted for with a corresponding adjustment in the purchase price to allow for these future contingent liabilities. If you are at all unsure about your obligations in relation to staff, you should seek professional legal advice.
Restraint of Trade clauses
Purchasing a business can often be an exciting time, but it can just as quickly turn into a disaster if you haven’t taken the time to dot your I’s and cross your T’s. Many a case has been litigated due to clauses restraining trade and competition (or failing to do so properly) upon the sale of the business. This is a common theme among many businesses, but is particularly prevalent among hairdressers and similar service industries.
Picture this: You’ve just purchased a hairdressing salon. As part of the purchase you’re receiving all client details and lists of customers. You plan to grow the business over the next few years as your brand awareness blossoms and your satisfied customers tell their friends. You need to make money in the meantime though, and that’s why you bought the business to begin with rather than start your own from scratch.
The first few months are going well, but you start to realise that business is slowing and the repeat customers are dropping off. After a bit of investigation, you realise that the previous owner of the business has opened up another salon just five minutes up the road and she has been calling all the clients of your salon. Furious, you organise an appointment with a lawyer to see what can be done.
The advice you will receive is directly related to the clauses in the contract. If you have negotiated an iron-clad restraint of trade clause prior to the sale of the business, then you’ll be entitled to commence legal proceedings against the former owner for a breach of contract. If the restraint of trade clause is vague or ambiguous, or there is no restraint of trade clause at all, then you may end up holding a very expensive pair of scissors.
There are numerous reasons to buy a business, but chief among all of them is to make money. If you’re considering obtaining legal advice or professional accounting advice but remain unsure whether the cost is worth it then you should be thinking long and hard about your decision to purchase a business. In most business transactions the answer is that you simply cannot afford not to obtain professional advice. The advice of an experienced lawyer will save you thousands of dollars in legal fees down the track when something goes wrong and will provide you with certainty and peace of mind so that you can get on with running your business and avoid the pitfalls that are all too common in business transactions.
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