September 03 2014
Getting value for money
Buying an existing business is sometimes preferable to establishing one from scratch. This article gives some pointers (but not an exhaustive list) to prospective purchasers to help ensure you get value for money.
There are many positive aspects in purchasing a small business, provided that you don’t pay too much for it. The most important aspect of the Agreement is the price which you are paying, and it’s important to ensure that this price is backed up by the profitability of the business. We strongly recommend that you have an accountant review the figures before you sign on the dotted line.
Be sure that the business which you are taking over on the settlement date is the business which you have purchased. Talk to us at this initial stage – we have seen a lot and may be able to help you spot trouble before you commit. Taking the time to visit the business premises can also give you a feel for the real atmosphere and dynamics within an organisation that accounts and balance sheets don’t provide.
Most small businesses rely heavily on key personnel and you need to know who those key people are and, if necessary, incorporate a provision in the Agreement to cover their continued employment situation. Enthusiastic and experienced employees can make or break a business. If staff members leave soon after you purchase the business, ensure that you factor into your purchase price recruitment and training costs required to get new staff members up to speed. Getting employment clauses right in a business sale and purchase agreement will also help you avoid difficult problems if there are any employees involved. Come and see us if this might apply to the business you are purchasing.
Buying the company v buying the business
You should consider establishing a new entity to run the business to minimise the risk of inheriting company debts, contracts and liabilities that may not have been disclosed to you. This also separates out your business venture from any existing companies that you own. The cost of incorporating a company is relatively small and enables you to tailor the constitution and ownership to your own needs. If the company name is the business name you want to retain, you should negotiate for the vendor to change their company name and free up that name for your use.
Restraint of trade clauses will bind the vendor company but not the vendor’s directors, shareholders or employees unless they enter into a separate deed. As with key personnel, make sure that you are tying in the commitment of those who can help you set up the business for success.
A well-drafted shareholders’ agreement can save you many headaches in unforeseen or unwanted scenarios if you are going into business with a partner. This will set out what will happen if one of you wants to get out of the business, dies suddenly or is unable to continue working. Having such an agreement can help avoid being left in business with someone who inherits from your business partner. It can ease the tension, give certainty and provide a clear process if one party wants to depart the business.
Buying a successful business is only part of the equation – in most cases you need a place to do business. If you lease premises, this is often the biggest cost and the longest commitment involved in the business. Make sure that you are comfortable with the terms and length of the lease, the outgoings and all the fine print. Be aware that it may be possible to negotiate a variation of lease or further rights of renewal as a condition of the purchase. Depending on the nature of your business, this can be the best investment that you make. If location is important, check that you have sufficient rights of renewal.
The Sale and Purchase Agreement
The wording of the Agreement is important for your protection. Minor errors in an Agreement can lead to huge financial cost – this is not the place to cut corners! Working with us in the negotiation stage (before you sign!) can help avoid unnecessary conflict or unrealistic timeframes. After the Agreement is signed, map out a timeline of all the matters to attend to before settlement and allow yourself some extra time to double check at each step rather than lock yourself into a timeline that is inflexible or creates unnecessary pressure.
If you’re thinking about buying an existing business, invest some time and talk with us early on – it will add value to your purchase.