Six Things to Consider Before Purchasing an Established Business
Acquiring a business is one of the quickest ways to get a business up and running without having to set it up yourself. However, it is not as simple and easy as it sounds.
Purchasing a business requires several commercial and legal considerations for you to make a sound investment decision. The business may seem profitable but is it the right investment decision to make?
There are several questions that need answering and lots of information to be collected before you proceed with the decision. Here are a few things you should consider before deciding to purchase a business.
1. Reason for Sale
While this may seem like the most obvious question to ask, it is not often the one that gets asked seriously. The sellers can reveal a lot about the business, its present condition, and the prospects of the business. There may be various reasons why they would be selling the business. As long as there is no reason that may be a cause of concern and make the purchase seem unprofitable, the purchase could be the start of a successful business journey.
It is also wise to ask the seller how long they have had the business. Long-standing company culture and reputation can be an asset in the case of a successful business. However, if the business is in trouble, the strong reputation in the industry can quickly become a liability and it can be difficult to bring change.
2. Due Diligence
The seller will provide you with information regarding the business, its prospects, and the financials. However, you must conduct due diligence as well to ensure your business interests are protected.
Ask and understand how the business has been valued. After you have conducted your due diligence, you will be able to evaluate if the purchase price being asked for is justified. Additionally, it helps the buyer evaluate the business’ risks and their risk appetite. It will also help corroborate your findings through due diligence and ensure that there are no discrepancies.
Due diligence requires a thorough check into the legal and commercial agreements of the business and assessing the financial viability of the purchase. Any discrepancies or issues should be resolved by discussing them with the seller before the purchase.
3. What Policies and Processes are in Place?
It is critical to know and understand the inner functioning of the business. A review of the policies and processes will also give you a fair idea of the work culture the company has. Knowing this also helps you identify whether these will align with your future goals for the business or will a policy revision be required.
Generally, businesses should have the following policies in place. A data breach response plan is an important policy that should be drafted. Employment agreements need to be in place for all the kinds of workers the company employs. There may be flexible work policies or casual workers’ policies that you should be aware of before you buy the business.
Policies in place would imply that the business takes its obligations seriously and complies with the relevant laws and regulations. However, if these policies are not being implemented, this could be a red flag. Hence, buyers need to be vigilant about whether policies are being implemented.
Consulting with a lawyer at this stage can be particularly helpful as they can guide you regarding which policies the business should be complying with and which it has. It is necessary to identify whether and which policy obligations the business is not complying with. Not knowing this could land you in legal trouble after purchase when you could be charged with non-compliance and it could be costly to fix up the mess.
4. Competition and Vendors Agreements
Understanding the competition can help you get a headstart with running the business. There will be no better source to tell you about the competition than the sellers themselves. They can guide you regarding who the competitors are and how the landscape has evolved. Once you know how extreme or mild the competition is, you can plan your strategy and resource allocation accordingly.
Before you get ownership, you should know who the vendors and suppliers are for the business. A long-standing business is likely to have several suppliers with a strong relationship with the business. These vendors are critical to business and can help you maintain the competitive edge so it is best if you continue good relations with these suppliers.
Before the purchase, review all documentation and contracts with suppliers. There may be clauses that you may wish to change depending on the future direction of the business. Again, ensure that all this is done cooperatively with the suppliers so you do not risk losing these valuable partners.
5. Business Plans and Projected Financials
Part of investing in a new business is to formulate the business plan and consider the project financial statements of the business. A business plan would include the strategic direction of the business, what are your goals, and who will you partner with to achieve your vision.
Projected financial statements help you visualise the revenue earning potential of the business and return on your investments. These statements can help you decide whether the investment will be a viable one.
6. Handover Period
Taking over an established business will be tricky since you have no prior knowledge of how this particular business is run. Working with the sellers can help you familiarise yourself with the operations, and the employees as well as build rapport with the valuable partners and suppliers. You may choose to negotiate a handover period with the seller so that the business can exchange hands smoothly.
- Before buying an established business, always conduct the required due diligence. Understand how the business has been valued and whether the business is financially sound.
- It is beneficial to understand the reason behind the sale. Also gather financial information about the business so you can calculate your revenue projections and make business plans.
- Study the policies and processes in place and you can use the handover period to gather a deeper understanding of the inner workings of the business.
When in the process of buying a business, seek counsel from an expert business lawyer. Negotiating deals, carrying out due diligence, and ensuring the paperwork, agreements, and contracts are legally sound can be tricky if you are not a legal expert. Hence, consulting a lawyer can help make the process of buying a business very easy with their experience and expertise.
The business solicitors at Lazarus Legal can help you conduct due diligence, audit the business’ compliance with all relevant regulations as well as negotiate for you the best business deal. Connect with us today to find out more about how our experts can help you.