Jane Garber-Rosenzweig, Principal at Gable Lawyers, offers us some advice to consider before buying or investing into a business.
Over the last 12 years I have seen many businesses change hands, which included mobile lawn mowing businesses, accounting practices, education centres, juice bars, burger stores, large retailers, gyms, real estates, mobile beauty therapists and coffee shops, just to name a few. As a commercial lawyer, I have acted in the sales and the purchases and have found that buyers were always faced with similar issues. Buying a business is usually a great opportunity, but naturally it involves a large financial outlay. The main thing to remember is to do your research and start it early. It may take a long time to find a business that is the right fit for you and that is also a sound financial investment.
There are many rewards and benefits in buying a business, including being your own boss, buying an established client based or territory and being able to leverage off the goodwill already created by the seller.
However, there are also numerous risks that need to be carefully considered prior to making a decision to purchase a business. Whether or not the business is right for you depends on your own personal situation, resources and availability.
Some of these risks include:
- Whether or not the business and/or its assets are worth the asking price
- Whether or not there are unknown liabilities which would pass on to the purchaser
- Potential breakdown of machinery and equipment after settlement
- Potential security interests registered by third parties over the assets of the business
- The customers of the business no longer engaging with you once you have taken over
- Key employees resigning and setting up in competition
- Changes in government legislation or policies
It is imperative that prior to buying a business, thorough due diligence is conducted, including performing all of the relevant searches, reviewing the legal and financial documents and verifying the information provided by the seller. It is recommended that the following are undertaken:
- All necessary searches on the Australian Securities and Investments Commission’s online database to confirm:
- the seller’s company name, if applicable;
- the registered business name
- which individuals are involved in the business as directors of the business operating company and owners of the shares or the business name
- Trade mark searches of IP Australia’s database to clarify if the trading name and logo of the business have been registered as trade marks (and therefore protected from use by others)
- Personal Property Security Register searches to ensure no security interests, which are like a mortgage over the assets of the business, are registered against the assets of the business
- Searches of the domain register to verify ownership of domain names used by the business
- Review, by an accountant, of all the available financial data, including the last three or more years of financial statements and tax returns of the business as well as all the costs, expenses and liabilities of the business
- Confirmation that there are no outstanding employee related expenses such as pay-as-you-go (PAYG) withholding, superannuation contribution amounts and any annual or long service leave
- Thorough review of all the legal documentation of the business, including any company or trust documents, if such legal structures are used to operate the business;
- Undertaking stocktake of the stock and ascertaining which of the stock is current and sellable stock
- Review of all:
- Contractual arrangements in place, such as lease of premises, any material client contracts and other arrangements in place with third parties; and
- Current permits and permits required to operate the business, for example a liquor licence or a permit for tables and chairs located on the footpath, in a case of a café or restaurant
- Research of the current market, the economic outlook and the current and potential competition.
Once the seller’s lawyer drafts a contract of sale of business, you will need to ensure that it:
- Includes comprehensive warranties from the vendor and its directors in relation to the business, its assets, its liabilities and any current claims
- Is conditional on you obtaining finance, if required and the lease being transferred to you at settlement;
- Includes a restraint of trade clause binding the seller (and its directors, if applicable) to not compete with you for a period of time and within a certain distance of the business;
- Contains a list of employees, all details of their employment and any leave owing.
One last aspect that often gets overlooked in considering a business for purchase is whether such business fits your lifestyle and your family situation. For example, being a baker requires commencing the baking process at 3:00am every morning, seven days a week or employing someone to do it. Ensure that you fully understand the time commitments of the business and your family will support it.
In conclusion, you should think carefully, assess all the information provided to you, obtain advice of an accountant and a lawyer and once you make a decision, be prepared for some hard work ahead.
As an experienced commercial lawyer, I am able to assist in all aspects of purchasing a business. If you want a knowledgeable, approachable and reliable lawyer to assist you in buying or investing into a business, please give me a call.