Legal Advice: Buying a Business

Legal Advice: Buying a Business

By: MBC Law
August 2, 2017

Buying or acquiring a business is an exciting prospect but one that needs careful due diligence to minimise risk and ensure it is a profitable venture. There are many benefits to buying a readymade business over starting one from scratch. For starters, you will have loyal customers, suppliers, access to a business plan, and usually the premise; but buying a business, no matter how successful and profitable it looks from the outside carries big risks.

Why are you starting a business?

The dream of running your own business should not be the reason you invest your life savings. People are successful in business because they have a passion for the industry, and attributable skills. Consider your end goal: Are you buying a business to continue its success, or are you buying to recover a failing business and sell it at a profit in a few years’ time?

You will need to consider the ownership structure for your business and the protection you can put in place to avoid financial risk.

Due diligence

The due diligence is an opportunity to assess the viability and potential risks involved in buying a business and the sooner it is carried out, the better. Just like the sale of a house or car, a business owner will make their assets seem more attractive to the potential buyer. It is crucial that you carry out your due diligence to ensure the projected earnings match up to the financials in the sales documents and the advertising literature.

Research the market and investigate the potential income based on customer loyalty to the brand or previous business owner, market demand, intellectual property rights, the staff and the IRD.

It is recommended that a full due diligence is carried out before the Sale and Purchase Agreement, or a Sale and Purchase Agreement can be made conditional until the due diligence has been satisfied. A well drafted agreement will streamline and simplify the process so it is important to seek help of your lawyer.

Your due diligence should include, but not be limited to:

  • Copies of personal and business income tax returns for the last five years
  • Outstanding tax earned on money before the sale
  • Access to all financial information; tax records, creditor tax invoices, bank statements
  • Projected income for the businesses, taking into consideration a potential shift in customers, your knowledge and passion of the industry

Sale and Purchase Agreement

Protect the future of your business by implementing warranties. To avoid the seller operating a similar business in the area, you may want to enforce a restraint of trade which prevents the vendor from opening a competing business or soliciting clients.

If you are purchasing a profitable business, promising to continue at profit, you may want to include a warranty for the turnover of the business and that the vendor will act in the best interest to preserve the high performance during and after the sale. Any loss incurred as a result of the vendors misdemeanor will be indemnified by the vendor.

What’s Included in the sale?

Good employees are the backbone to a business. Buyers of the business are not legally obliged to hire existing employees, but existing employees can be a valuable asset. If you do choose to keep employees, the existing terms and conditions of employment do not have to be the same and they will operate under different contract. Accrued leave does not roll over, unless agreed with the seller in the Sale and Purchase Agreement.

If you are operating out of brick and mortar, check the terms of the lease and the rights to a renewal. You do not want to be shifting the location of your business after a few months of building its presence.

If you are thinking of purchasing a business, you will need the help of a good accountant and lawyer to ensure you are embarking on a profitable venture with minimal risk. Contact one of our commercial lawyers today.