Commercial lawyers can help North Shore business buyers
Buying a business is a major decision which needs plenty of thought and investigation before you commit yourself to an arrangement that ultimately you do not want. The key is not to be rushed by the seller. Take your time and get things right. In fact, if the seller is pushing you to sign documents, then you may ask yourself why they are doing this.
The most important point to remember is that any agreement you make in writing is probably fixed under the legal system so do not under any circumstances commit to anything without first consulting a commercial lawyer and an accountant. These two professionals can make life much easier for you, they can save you a lot of grief down the track and they could even save you money on the purchase price.
Talk to your lawyer
So, let’s look at some of the issues you must consider before signing any documents. For simplicity we can group them as commercial, financial and legal issues but each must be taken care of before any commitment.
Commercial
This aspect covers the broad trading arrangements of the business for example, the agreements with any suppliers. You need to check the contracts that are in place with the key suppliers. Are the strong legal documents or is it an informal arrangement between the current owner and a friend.
You should look at relationships with major customers. Again, are there well drafted supply agreements in place that will give you continuity in business or again is it a loose arrangement that could change overnight and leave you with a big gap in your sales?
Often, when someone has built a business, the relationships are personal and the success of the company depends on the owner. A new owner doesn’t have that relationships and so more formal agreement are needed to ensure your supplies and sales.
Financial
It is important to bear in mind that when you are buying a company, you are in general buying its history. The price you pay is most likely dependent on the profits it has made over the recent past. Therefore it is clear that you must be confident that the financial records you are basing your purchase on are true. You could easily over-pay for a business if the financial records do not accurately reflect the historical sales and profits of the business.
To ensure this is the case, you must consult a qualified accountant. They will be able to look over the accounts to determine whether the sales are consistent or if there was an unusual bump in the figures. You do not want to be paying a figure based on an extraordinary sales event.
Another factor here is the Goodwill of the business. This is often an intangible issue so you will need someone who is experienced in assessing the value of goodwill. In some companies, especially those with a well-known brand, the goodwill can amount to a significant proportion of the selling price.
Check for true stock valuation
One issue which also has a commercial aspect is the stock. Your accountant can verify the stock valuation as shown on the books but you need to dig deeper to understand the make-up of that inventory. Is it stock that is still in demand by customers are you going to be buying dead stock that no-one wants which ties up your capital so you cannot invest in better stock?
Legal issues
Much of the legal matters relate to contracts and agreements for the company and various aspects.
The purchase is usually undertaken using the standard Sale and Purchase Agreement used for selling real estate. This gives everyone a clear understanding of the basic terms of the purchase. This will include a register of any fixtures and fittings that are included in the sale. A key point in this regard is the plant and machinery for manufacturing businesses. Sometimes, the company may not own the plant but operate it under various trading arrangements such as a lease or hire purchase. The new owner of the business and the owner of the plant have to be in agreement about the future use and terms of the plant.
However, there are often some particular clauses that you may want to include. For example, do you want a restraint of trade? This means that the seller cannot set up in competition to you within a certain radius of your business or perhaps within a certain time frame.
You may also want to keep the seller involved in the business for a fixed period. This could be as training period while you become confident with the running of the business or perhaps a more long-term arrangement. Maybe, you want the seller to stay on as a sales person for the business or as a technical wizard depending on their skills.
There will be other legal documents that need taking care of. These can include leases for the premises if there are any, contracts or employment agreements for the staff and if the business is a franchise, new trading agreements will need to be put in place.
In conclusion
This is a simple overview of some of the issues involved in buying a business. It is not an easy process since there are many legal and commercial documents that need to be clearly understood before they are signed. It is absolutely essential that a prospective buyer of a business consults both an accountant and a North Shore commercial lawyer before they enter into any binding agreements.
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