Reducing Your Risk When Buying a Business

Do your research before the settlement date

Contracts for the sale of a business normally state a settlement date when the purchaser takes possession and pays the balance of the purchase price. If the purchaser discovers or suspects the seller has supplied misleading or incorrect information, or if for any reason the purchaser regrets buying the business, there is very little that can be done afterwards. You can protect yourself by carrying out the following 8 tips:

1. Market research

Market research radically increases your chances of success. It is the process of gathering and analysing information to help identify and define market opportunities and problems. This information will help you find out if the industry still has potential for growth. It will not only help you decide whether it's worth buying the business you're interested in, it will also help you consider how the business can be improved once you take over.

2. Work in the business

Insist on the right to work in the business, preferably before entering into a binding contract of sale or at least prior to settlement. This gives you the opportunity of checking, as far as is possible, the accuracy of the information provided by the seller. If there is any evidence that the seller's information is not reliable, you may have grounds to refuse to settle, keeping most or all of the purchase price.

3. Performance clauses

Insert a performance clause into the contract that specifies the minimum takings of the business over an appropriate period leading up to settlement. If the takings reach the specified amount then you the purchaser must settle, but if the takings do not reach the specified amount you may withdraw from the contract and recover the deposit.

4. Transfer of existing contracts

Where it is anticipated you will take over some important customer contracts, such as in a cleaning or maintenance business, it should be a condition of the sale contract that those contracts are transferred to you.

5. Payment in stages

Structure the contract so that payment is made in stages. Most contracts call for payment in full at the time of transfer. But some part of the purchase price could be retained for a certain period and if necessary placed in trust with a solicitor or estate agent. If a dispute arises after possession is transferred, the retained money provides you with some bargaining power as the purchaser.

6. Guarantee on representations

You should ensure any representations made by the seller, whether written or otherwise, are guaranteed by the seller as correct and that this guarantee is incorporated as a condition in the contract. This will make it much easier for you to take action against the seller for any misleading or incorrect information.

7. Restraint of trade

Insert a restraint of trade clause in the contract. This will restrict the previous owner from operating a similar business within a certain distance for a number of years. Some clauses are written to say the previous owner cannot open a similar business within a five-kilometer radius for five years.

8. Check the financials records carefully

Make sure you check all financial liabilities. People buying a business with employees can often end up with unexpected bills if long-serving employees have long service leave entitlements. For more information about buying a business for sale, read our article on the 6 key points that you must consider prior to purchase here