What to look out for when buying a business

Are you considering buying a business but don’t know where to start? Do you feel overwhelmed because you don’t understand the process for buying a business? If “yes” is the answer to either of these questions then don’t worry, you are not alone. Alongside buying your own home, this is one of the biggest investments that you will ever make.

Understanding the scope of what needs to be done

Every business is unique, there is no one-size-fits-all approach to business purchases. Different consultants bring different strengths to the table in the transaction. Understanding what they do and how they can help you is crucial to the success of the purchase. Every transaction that went badly I have seen could have been saved had the consultants just spoken to each other. The different consultants are:

  • Lawyer – helps draft or negotiate your contract, review all agreements and make sure that you are entering into the contract that is right for you.
  • Accountant – advises you on the financial aspects of the business and your due diligence enquiries. They need to make sure that you are getting what you are paying for the business.
  • Commercial real estate agent – if you are leasing premises then you need to make sure that the lease is fair and reasonable in the current market. An agent will be able to tell advise if this is the case.
  • Specialist consultant – some businesses require special licences based on the regulation of their industry. There are often consultants for these types of business who specialise in assisting business owners to get the correct licence and have the right paperwork in place. You should utilise their knowledge and skills as they are invaluable.

Unless you are experienced in buying and selling businesses, appoint one of these consultants to take the primary lead on the transaction. Usually that will be a lawyer as they will need to coordinate the contract and is the right person to make sure that all steps are undertaken.

What is it worth?

You need to determine what the business is worth before you enter into the contract. If you are unsure you should seek advice from your accountant and obtain a valuation from a business valuer so you know that the business is not overpriced. Many buyers do not undertake the step of obtaining a valuation and then regret it later. So, get a valuation to make sure that the business is worth what you are paying for it before you enter into the contract.

Licences/regulations

Many businesses are regulated and require that you obtain a licence or meet certain criteria before you operate that type of business. There is good reason for this– these types of businesses are ones that have a history of dishonest owners and that are in a position of trust. Examples include builders lawyers, accountants, financial planners, businesses that sell liquor and mortgage brokers, if you believe that the business may require a licence to operate then make sure you research that – if you do not then government departments have the right to shut down the business or fine you if you operate without the proper licence.

Buying a business is a complicated process, but can be such simpler if you obtain the right advice. Discussing the full scope of everything required before you buy the business will save you from many problems in the future.

Jeremy Streten, author of the “The Business Legal Lifecycle”

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