Buying a business can be an exciting time. Taking on an existing business without all of the worries and uncertainties of a startup certainly has its advantages, but beware – there are a number of things which can go wrong.
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Purchasing a business – Buyer beware
If you don’t do your homework on the new business (a process known as due diligence), you are putting yourself at considerable risk – because there may be nothing you can do if problems come to light only after you’ve already bought the business.
So it’s your responsibility to ensure that the business you are buying is what you are expecting – as the ‘buyer beware’ rule generally applies when it comes to business acquisitions. So cutting corners on this type of due diligence can prove very expensive
A business might seem successful, but there could be problems under the bonnet or things which only come to light after you’ve bought the business.
This is potentially devastating, so planning for these potential pitfalls and avoiding them in the first place is vital.
An existing business comes with a whole range of assets and liabilities, from stock to staff, profits to problems.
Due diligence is essential to know what these potential problems are before you even begin, allowing you to plan for them and ensure that they do not scupper your ambitions for success in business.
Common problems to avoid when buying a business
Although there are many potential hazards, some of the more common problems you need to avoid when buying a business include:
• Paying over the odds — There are a number of things which affect the price you will pay for a business, including the economy as a whole, the seller’s motivation for selling, the seller’s personal circumstances, the type of business, the market it is in, its physical location, its current state of financial affairs including turnover and profit margins, its current customer base and reputation and a whole lot more.
The seller will have his or her own valuation of the business, but a specialist business solicitor with experience and expertise in acquisitions working as part of a team with your accountant will be able to help you decide on what is the right price to pay.
• Breaches of confidence or sellers playing you off against another potential buyer — This can make the whole experience far more protracted , not to mention more expensive, and can cause a great deal of unnecessary stress.
By agreeing an exclusivity period, you can ensure that the seller does not discuss the potential sale with anyone other than you.
Without such an agreement, the seller is free to discuss it with anyone or try to start a bidding war.
• Due diligence — as indicated above, due diligence is an important part of any business acquisition. Due diligence varies wildly from business to business, so there’s no simple set template to work from here. But it’s a process that must be done, and must be done thoroughly.
• Failing to insist on restrictive covenants — when you buy a business from somebody, there may be nothing to stop the seller immediately starting up another business doing the same thing, using the same customers and effectively becoming your biggest competitor. By insisting on a restrictive covenant appropriate your circumstances and drafted by your solicitor, you can ensure that the seller agrees not to become your competitor from day one
• Drafting the right contract of sale — if you fail to appoint a specialist solicitor and don’t get the right contract drawn up, you could be storing up huge problems for your new business. In particular you want to ensure that the right warranties and indemnities are covered in detail.
• DIY legal documentation — doing without a specialist solicitor to advise you throughout could prove disastrous. Don’t rely on just a verbal agreement or try to adapt your own contract from one you found online. If you’re serious about buying a and growing a successful business, you need the right legal advice from day one
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For the right advice on buying your business – call us today
Whatever type of business you intend to purchase, getting advice from specialist commercial solicitors with plenty of experience in business acquisition is vital.
Here at Bonallack and Bishop our commercial law team have the specialist experience you need.
So if you’re thinking about buying a business and want some impartial legal advice, call us now and we’ll be happy to discuss your options and help to ensure your future success in business.