Module 8-: Buying a business as opposed to starting one from the scratch is a good idea for so many reasons; you can leverage on the experiences, success, patronage and support. It can also be a flexible way to finance your business especially if you are able to find a seller who is willing to allow you flexible payment options. There are so many benefits of buying a business as there are disadvantages too. However, you have to be careful if you decide to buy a business. You have to perform your due diligence and pay attention to different aspects of the business before you enter into a contract.
One of the aspects to pay serious attention to is the legal aspect of the business. You can ask your legal adviser to help you out but even if you do, you have to know what exactly to look out for after all, your legal adviser would not be the one to manage the business for you. Some of the legal issues you would face when you want to buy an existing business include the following-:
10 Legal Issues You Will Face When Buying a Business
1. Full Disclosure-: The seller has to agree to make full disclosure of all issues regarding the business. It is illegal for a seller to fail to disclose information about the business to the buyer or to give false or misleading information. As a buyer, you can seek redress under the law if a seller has misled you or disclosed false information in the process of selling the business to you. Before the negotiation stage, ensure that the seller signs a disclosure document promising to supply all necessary information that are true and correct and would assist you (the buyer) in making an informed decision.
2. Ownership Structure of the business-: Another issue that must be scrutinized properly is the ownership structure of the business. The business can either be bought as a sole trader, a trust, company or partnership. Therefore, you should consider obtaining professional advice from your accountants or lawyers regarding this. You should also consider issues of asset protection and taxation.
3. Non-Disclosure Agreement-: Before you start negotiating a purchase, you must ensure that both parties sign a non-disclosure agreement. This is different from the full disclosure agreement discussed in the earlier part of this article. While full disclosure is an agreement by the seller to supply all necessary information to the buyer to enable him make informed decisions regarding purchase of the business; non-disclosure is designed to protect both buyer and seller from release of sensitive information which may have a negative effect on either party.
4. Right to sell-: Another thing to consider is whether the person selling the business to you indeed has a right to sell the business. You would want to understand the ownership structure of the business, whether there are partners and if there are; whether they are aware and agree to the decision to sell. You would also need to understand the shareholding structure of the business and issues of bankruptcy. It is important to obtain written statements and guarantees to this effect.
5. The value of the business-: You would need to determine the value of the business before you can offer a price for it. For instance, you have to find out the goodwill of the business which is the reputation of the business. You would also need to know if the company is properly registered with the necessary regulatory agencies and if there are any existing non-compliance or legal issues.The business premise is another important item that has to be looked into. You would want to know if the seller has full ownership of the business premises or if the premise is on lease.
If the latter is the issue, then you would have to ask for a transfer of lease rights or enter into a new lease yourself. The business assets like plants and machinery are of importance too; a complete inventory of assets must be provided as well as a list of exclusions. The value of the assets must also be determined and all assets must be inspected to ensure that they are in good working conditions. Other assets like stock, intellectual property, debtors, creditors and cash must also be reviewed too.
6. Mortgages, Encumbrances and Charges-: It is the seller’s duty to resolve all issues of outstanding mortgage payments and charges. All encumbrances on assets and stocks must also be settled by the seller. However, in some circumstances the seller can transfer the liability to the buyer but this must be duly discussed and agreed to during negotiation.
7. Knowledge of the industry-: Every industry has its rules, regulations and governing bodies. Food and drug production companies for instance must adhere to FDA rules. It is important for you as the buyer to understand all of these rules so that you can know what exactly you would be getting into and how to comply with laid down regulations.
8. Business Restrictions-: You must also address issues of restrictions. You may need to have the seller sign a non-compete agreement to restrict him from trading in a particular business
9. Employee Related Issues-: It is also up to you as the buyer to determine whether or not to retain the current employees of the business. This is very important because sometimes a company’s success depends on its existing staff. This is why you must be careful about making a decision as to whether to retain or do away with employees.
10. Payment/Funding-: There should also be a solid agreement as to how the payment would be made. If seller financing or installment payments; the agreement must be duly signed and documented.
In conclusion, it is very advisable for you to involve professionals in the process of buying an existing business. They would be able to bring in their professional expertise and protect you from making mistakes or taking decisions that may affect you in the future. They would also offer you necessary assistance so that you can get a fair deal.