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Becoming your own boss? Key considerations when buying a business
- AuthorMignonette Ellis
Whether it is to fulfill a lifelong dream, be your own boss or maximise income, there are important considerations when buying a business in order to avoid entering a bad deal.
Share purchase or asset purchase are two ways in which you can buy an existing business. If you are looking to buy a business “warts and all” you will be looking at a share purchase. If cherry picking the best assets whether it is goodwill, equipment or everything other than the debt, an asset sale is more appropriate. The structure of your desired purchase will need to be agreed by all parties, and one of our expert solicitors can advise you on the best structure for your deal.
Thought must be given to the following points:
- Finances: it is important to know if your future endeavour is currently profitable or not. If not, you will need to evaluate whether you can make it profitable, which may be possible. A careful examination of the numbers by an experienced accountant will aid not only in your decision of whether to go ahead or not, but the finances often provide a fundamental negotiating point later in the transaction. The purchase price is often influenced by the current state of financial affairs and therefore should be considered carefully. Consideration of the accounts, debtors and creditors will put you in good stead ad negotiations proceed.
- Warranties: the document that facilitates the purchase will include a list of warranties. These are statements of fact that you are requiring the seller to give about the business. The seller will look to reduce the amount of warranties given because if it materialises the seller gave false or inaccurate statements, you can sue. You will want to obtain warranties that deal with fundamental parts of the business, particularly those that caught your attention in the first place. Obtaining warranties will ensure that the seller has not painted a picture of your future investment that is untrue. Negotiating this part of the deal is usually what takes up most of the overall time of the transaction, but it is worthwhile getting it right.
- Reputation: although it does not often appear on a balance sheet, ‘goodwill’ is an intangible asset of the business and adds value to the purchase. If the goodwill is substantial then it is likely to attract a higher price however, this should have the same benefit for you. Equally, lack of goodwill and a bad reputation could be difficult to turn around, so make sure you do your research about the company as it currently exists.
- Day-to-day: this may seem obvious, but not all businesses run as they seem on the surface. Sometimes it is wise to make arrangements to be involved with the business prior to completion to see how it operates. After completion it may be advisable to retain the seller on a consultancy basis for a period of time after the sale to aid in the transition period between seller ownership and your ownership. The seller would of course need to be agreeable and will likely require payment for their expertise. This could be invaluable to the success of your business although plenty of purchases have been successful without retaining the seller. In any event, ensure you are clued up on what needs to be done for the business you want to run!
It is important to be clear about what you are about to invest a lot of money and time into before you do it. Our experienced Commercial Team are on hand to help answer some of the tricky questions and make the process as smooth as possible from start to finish.