What To Consider When Buying a Business
It is often thought that it is more of a risk to start your own business than buying an already established one. However, this is not always the case, as venturing into buying a business that is already operating without carrying out the proper research can be even more risky than starting your own business from scratch. The research includes the proper assessment of the financial statements by a qualified accountant plus the legal obligations and transactions by a commercial lawyer on the North Shore.
Some among the many questions to ponder on is whether the previous owner has been compliant to paying his taxes, is the customer data accurate, and also the terms of any leases at hand. Below are a few points regarding due diligence and legal aspects you need to know before purchasing an existing business.
The Due Diligence Phase
This phase involves thoroughly researching the company by finding out what lies behind the seller’s business. You do not want to get surprises once after the deal is done. This can be done by considering the following areas of concern:
Business Finances
It is extremely important to research the business finances to find out how it is performing. Do not simply look at the profit from last set of accounts. You need to look in depth at the numbers to see if the profit has been inflated. And as well, you should look at the figures over the last few years to see what trends there might be. Is the business declining due to poor management which you can turn around or is the market declining? You should also verify that the business lacks any form of debts and is viable as trading entity. It is essential to involve a highly specialised accountant to see you through this process as the effects that may arise from here are quite consequential.
Legal Issues
Take note of the businesses compliance and obligations to legal issues including any form of existing contracts, intellectual property rights, licenses, insurance policies, permits and the Employment Agreements are up-to-date. The last thing you want is to take on a series of employment law transgressions.
Employees
It is good to note that in any business, employees are one of its most valuable resources. They are the backbone of the business and usually have deep knowledge of how the industry and the business work. That said, you should learn all you can about them as they determine either the success or downfall of your would-be new venture. This is accomplished by you and your lawyer going through the related documentation on employee records, with the permission of the Human Resource Officer.
Business Structure
This is important to look at depending on the form of business you intend to purchase. Both the legal and tax obligations are different depending on the business structure. Thus ensure that your lawyer has fully explained how each purchasing option will affect you.
Determine what you are buying
It is advisable to take note of what part of the business you wish to purchase. Are you interested in the purchasing both the entity and any stock in that business or just the marketing assets of the business? Once you are sure of what you are interested in, then put this down as a formal agreement stating the terms of the asset acquisition. It is also important to take a look at the business name, licenses and other important intellectual property if they are transferable.
Consider Forming a New Legal Entity
Get advice from your lawyer on whether it is advisable to create a new entity, which will acquire the assets of your target business. As a general precaution, forming a corporation to buy a business is deemed to lower your personal risk for the business’s obligations.
Writing a Letter of Intent
Once you have decided what exactly you are buying from the business, a letter of intent should be drawn up by your lawyer outlining what will take place after the transaction.
Negotiate Purchase Terms
Once you have made your decision to buy, it is highly recommendable to have an expert determine the value of the business and finally work with a commercial lawyer for buying a North Shore business to draft the sales agreement.
Bringing on Board Employees
This is quite important as you need to be sure if you will keep all the employees in the business if buying the whole entity. Suppose you decide not to, it is wise to inquire from your employment lawyer concerning worker protection rules. Often you cannot simply reduce staff numbers or single out an individual to sack. The laws governing employees are very demanding and can be extremely expensive if you get them wrong.
It is advisable when buying an existing business, to follow the above steps and consult a commercial lawyer on the North Shore who will ensure that you start running your new business without any legal problems.