Commercial Law

Purchase and Sale of Business

Purchasing a business involves much risk; therefore, proper evaluation and consideration of a myriad of factors are imperative. Prior to committing yourself to purchase a business, it is important that you have the right skills and information to make an informed decision. Due diligence must be conducted beforehand to avoid costly financial mistakes. Some of the questions you would need to address prior to purchasing a business are as follows:

1. Reason for purchasing the business: it is always helpful to ascertain your long-term goals and evaluate how purchasing the business would assist you to achieve those goals.
2. Type of business you’re planning to buy: ensure that you have adequate market research and are aware of your competitors.
3. Raising the finance to purchase and operate the business: careful assessment of your security, capital and other sources of finance is necessary in order to avoid financial pitfalls. Always consult a financial adviser to address these issues.
4. Ascertain the real reasons why the seller is looking to dispose of the business – this is often quite different to the reasons given to you during the inquiry and negotiation process.

There are series of compulsory pre-purchase checks, inspections and factors to consider in order to protect yourself.

Sales – what are the patterns and trends? Who is the customer base and current suppliers?

Costs – what fixed and variable costs exist including staff costs?

Profits – how do you analyse financial records, future cash flow and profitability?

Assets – what are the assets, including intellectual property and leasing arrangements? Who owns them and who has a security over them?

Liabilities – what are the outstanding debts, refunds and warranties applicable? Is the vendor currently subject to any legal action for torts, damages, breach of contract etc?

Purchase agreement – what are the terms of the sale?

Tax – what are the GST, Capital Gains Tax and stamp duty implications to you?

Legal issues – how will you effect a transfer of any leases? What is the best business structure for you to move forward?