What’s the law when buying a business?

There are many important legal considerations when buying a business. Here are some of the most important steps to consider during this process, according to LegalVision.

Are you buying the assets or the shares?

There are two ways you can buy a business: by purchasing the assets or the equity.

Buying the assets involves transferring the assets individually to the new owner. While this can be a complex process, its benefits include minimal tax exposure and reduced liability.

If a company owned the assets, the seller would still own the company shares and the company. All the assets previously held by the company, however, would be transferred to the buyer. Buying the equity involves purchasing shares in a company. Buying shares means you purchase the company, including any assets owned by the company. Whatever method you use to buy a business, expert tax advice should be sought at all steps.

Assets

Regardless of whether you purchase assets or shares, the seller should provide you with a complete list of all assets owned by the business before you exchange contracts.

Ideally, a ‘depreciation schedule’ will assist you in identifying when the equipment will need repair work or replacement. This will help you anticipate any upcoming costs and create a budget for your new business.

Staff

An important decision to make when buying a business is whether you will keep some or all of the seller’s employees.

It is a good idea to speak with the seller about their employees, including their skill set, industry experience, and overall value to the business.

Keep in mind that you are not obliged to employ any of the existing staff, so think about whether they would bring value to your business, or whether hiring new staff would be a better approach.

Legal documents

Make sure you obtain copies of any legal documents that prove the seller is the true owner of the business and any ancillary contracts.

Including things such as; business registration certificates; a commercial lease for business premises (note: this will need to be transferred to you); employment agreements; supply and distribution agreements; and any other relevant agreement.

Checking financial records

Simply reviewing the company’s financial statements, like the profit and loss statement and the balance sheet, will not give you the whole picture and might be misleading as to the financial viability of the company. If possible, look at these and the sales records to get a better understanding of where the business strives and struggles. You should get more of an insight into the busy and quiet times of the year, as well as the popular and unpopular products.

Make sure you enlist your accountant’s help in assessing all of these financial records.

Due diligence

Conducting due diligence is critical to assessing the value of a business. It will also identify the financial viability of the business, and overall prospects of success.

Due diligence will also help you determine any legal compliance issues or criminal history of the business, thereby reducing your future liability risk. Firms like LegalVision can help you review all documents and make sure there are no hidden legal issues in the business you are buying.

Regulatory bodies

When you buy a business, there might be certain regulatory bodies with which you will need to comply, like attaining correct permits or licensing. Before becoming a business owner, check what conditions the ACCC or any other government department or organisation will impose on your new business, especially if you are buying a large company where certain rules relating to competition may apply.

Franchised business

If you are buying a franchised business, make sure you review the franchise agreement so you understand any obligations created by that document.

Steps to purchasing a business

There are a number of official steps in purchasing a business, these include:

1. Inspecting the business/ negotiations. You should thoroughly inspect the business, conduct your due diligence and negotiate the purchase price with the seller.

2. Heads of Agreement. A terms sheet or heads of agreement outlines what the terms and conditions of a binding agreement would be. The binding or non-binding nature of the terms sheet needs to be expressed in the document itself.

3. Confidentiality agreement. A confidentiality agreement might be entered into at the start of negotiations (or due diligence).  This will have the effect of preventing either party from disclosing any details of the negotiations of each other’s business that may be privileged and confidential.

4. Sale of Business Agreement (or Asset Sale Agreement or Share Sale Agreement). This is the final agreement and is legally binding. It establishes the terms and conditions which the buyer and seller both agree upon. It is important to get advice about having this document reviewed and drafted by a business lawyer so your rights and interests are protected. It is not always necessary for both parties to enter into all documents above.

Good luck!