Purchasing an established business rather than starting a business from scratch has the benefit of ongoing cash flow and an established infrastructure.
The process no matter the size of the business can be a challenging and stressful.
In our experience the clients who have done their homework and researched the industry are usually the most likely to succeed.
The first step
Without doubt the first step is to actually determine if you are ready to start a business and you have the appropriate skills.
It is important to understand the time, money and both mental and physical exertion it will take to make it a success.
Consider what your short and long term goals are for the business and yourself personally.
Make sure you understand the business and you are comfortable that you have the personal qualities to work in that industry.
It can’t be underestimated who much that research into the industry is paramount to ensuring success in the future.
Find the right business
Finding the right business is often not easy.
Remember it is not productive to work in an industry which you have no interest in. There must be a level of compatibility with your skills and personal interests.
Speak to your trusted advisers including your lawyer and accountant. It is often also prudent to engage a broker to assist you with the search.
Do you want to buy a business or are you more suited to a franchise model? They both have different pros and cons.
Consider the location and geographical reach of the business and how you will be able to deal with possible contraction or expansion to grow the business.
Get a feel for the business and visit the business at different times to see how it operates. Even speak to customers or suppliers discretely.
Above all can you bring value to the business.
Consider the valuation of the business
Make sure you engage with your accountant or financial adviser to get an idea of the value of the business and most importantly the potential for growth and expansion.
Sometimes it is worthwhile getting a valuer to provide a professional opinion as to the value of the business assets and liabilities, including stock.
Due Diligence
The most important step in the process is to conduct a thorough and professional due diligence process.
Engage with your lawyer and accountant to ensure all aspects of the process are covered.
Due diligence is financial, legal and commercial.
You will need to obtain and examine:
- All financial documentation including taxation returns (preferably for the past 5 years), balance sheets, assets and liabilities, loan and lease documents
- Legal documents including all agreements, contracts, employment agreements, licences, permits, insurances, regulatory documents and intellectual property
- Operations documents including policies and procedures, workplace health and safety, logistics, business plans, training manuals and codes of practice
This list is definitely not exhaustive but is a good starting point and will depend on the nature of the industry the business operates in.
Some industries requires specific training and clearances granted by government departments.
Consider the offer you want to make
If you are satisfied with the due diligence and you are wishing to proceed, then it is time to consider the offer you want to make.
Often there can be protracted negotiations before a price is agreed.
If you are not comfortable with undertaking those negotiations rely on the broker if applicable or you legal and financial advisers to undertake this.
There are a number of ways to pay for the business. You can pay all the funds up front, have a retention or even consider a level of vendor finance.
The Contract
Your lawyer will assist in the preparation of the offer and contract to purchase the business.
Consideration will have to be given as to the type of transaction and whether it is a share sale, sale of units, sale of a business, sale of assets, joint venture or merger.
The contract with contain all the commercial terms including guarantees, undertakings and warranties relating to the business.
A good business and commercial lawyer will be able to assist with all aspects of the contract including:
- pre-transaction preparation;
- initial negotiations and due diligence support;
- contract preparation, refinement and execution; and
- support with the pathway to completion.
How can FC Lawyers help?
Our experienced business and corporate team have literally assisted thousands of clients with their business purchases for over 30 years.
Contact our dedicated team for an obligation free quote and to discuss your needs.
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