Part of the “freedom” people look for when opening their own business is the freedom to be their own boss. But you don’t have to build your own business from scratch. You can buy an existing one! Here are some important details you’ll need to literally, mind your own business when you’re purchasing an existing one.
What to put the emphasis on when purchasing an existing business
We do not always choose or plan to start a business from scratch. Sometimes out of the blue an opportunity arises for us to be able to purchase an existing business.
There is a big plus to buying an existing business. You save on the initial stages of development. An existing business usually comes with a reputation, active customers, professional and business knowledge, an active workspace and much more.
Sounds good right? But before you take out your pen and commit, there are a number of preliminary issues that need to be checked. These will help you confirm (or not) the viability of the deal and how worth it it actually is.
When purchasing an existing business, one must take into account that it comes with a “history”. That’s why a number of preliminary tests must be performed. The goal is to get a complete picture of the business you are interested in – the risks and its chances of success.
Due diligence is crucial
Due diligence is a comprehensive examination that shows an overview of the business from a legal, business and accounting standpoint. It includes several elements. Only after we get all the relevant data can we understand whether buying the business is worthwhile for us.
What exactly is the status of the business?
Is the business a limited company? An authorized dealer? Partnership? How was the business incorporated and was it done legally? Does the business hold the permits and licenses to which it is legally bound? What are their terms and validity? Are there any current legal proceedings against the business? Were there any in the past? If so, what is their current impact on the business and its conduct?
Agreements with customers and suppliers
Any material agreement signed by the business should be reviewed, including agreements with customers and suppliers. The period of engagement of these agreements should be examined, how they can be released, and what the obligations of the parties are under the agreements. It is also necessary to understand whether there is a business dependency. That means whether the business is dependent on one main customer or one main supplier.
Are the copyrights and trademarks of the business protected? Does the business infringe on the copyrights of others?
The terms of employment of all employees of the business should be examined. Does the business comply with the labor laws towards its employees? Are there obligations towards non-fulfilled employees? Will a change in manpower be necessary (dismissals, recruitment) and what are the costs associated with that?
The financial statements of the business should be checked, including balance sheets, profit and loss statements, cash flow, assessments submitted to the tax authorities, liabilities to banks or other lending entities, credit status of the business, inventory status and so on.
The last business cycle and previous business cycles should be examined. Whether there is or was an increase or decrease in the expenses and income. Trends in the market in which the business operates, the status of the business in that market, the main competitors of the business as well as future trends in the market should be examined.
It should be noted, there are additional details that need to be examined and this depends on the type of business, the type of transaction and the scope of the activity of the business.
What are we buying?
Based on the due diligence we will know exactly what we are buying. Are we buying the business as a whole, the ownership of its shares? Do we acquire the business activity or only part of it?
Each type of acquisition has implications for the nature of the engagement and its terms, including economic, business, legal and accounting implications.
Once you have formulated what the purchase will be, and after you have negotiated with the owner and reached agreements – a purchase agreement must be made.
The purchase agreement will include the agreements you reached and regulate the relationship between you and the previous owner, taking the transfer of ownership into consideration. Moreover, a good purchase agreement should protect you as buyers in the event that the seller did not present you with the full picture regarding the business you purchased.
As you conduct the comprehensive preliminary tests and consult with someone who is experienced in this, you will reduce the level of uncertainty involved in such a purchase and you will be able to increase your chances of making a successful transaction.
Ask for Aviram Goldstein in the Business Department of Hait Family Law at 077 200 8161