How to Successfully Buy a Business – Demystifying the 5 Main Stages of Buying a Business
Buying a business is not a task you should take lightly. You should take your time and surround yourself with experienced advisors. We get too many people contacting us after they have signed a binding contract with issues that we could have picked up before they signed. Here is an explanation of the 5 stages of busying a business and what to expect:
STAGE 1 – Choosing the right business to buy
There are a few key things to think about before deciding which business you are going to buy. This decision involves you reflecting on what kind of business you want to own, for example:
- Do you want to buy an owner-operated business (where you own all the assets associated with the business) or a franchised business (where you are bound by a franchise agreement and do not own all the business assets)?
- Do you want an online business, a mobile business, or a premises-based business? Each of these options entails different obligations such as taking a premises lease.
For more information on this vital first step in buying a business, please read our detailed blog: 10 Key Things to Think About Before Buying a Business
STAGE 2 – Do your due-diligence
It is important to do your own research to investigate the history, standing and reputation of the business you are wanting to purchase. This can involve things like finding out whether the previous owner has been responsible with their assets and financials. If you miss this step, you may be faced with costly consequences down the track. Important procedures to undertake include:
- Finding out why the seller is selling. For instance, is the owner retiring? Or are they selling because the rent is too high? These are things you need to investigate.
- Determine how good the premises lease is (for example how long the term is and whether or not the landlord intends to renew the lease at the end of the term).
- Finding out where the business stands financially. You will need a good accountant to help you with this and a lawyer to do all the necessary searches.
Please see our blog for further information: What to Consider When Buying a Business
STAGE 3 – Negotiating the terms of the contract
Establishing the value of the business:
To determine the actual value of the business you are wishing to purchase, you will need to engage an advisory team that can calculate the true value of the business and assist you in offering a suitable purchase price to the seller. You will need to make it clear if this offer is inclusive or exclusive of Stock.
Drafting a letter of offer/ heads of agreement:
A letter of intent or heads of agreement is often drafted once the seller and buyer have finished the negotiation stage, it puts all the agreed terms in writing. This document is not an official business purchase agreement. It details the buyer’s intent to purchase the seller’s business. This often includes all the formalities of the agreement such as the negotiated purchase price, and other essential terms. This document will be different depending on the circumstances of your business purchase and the wants of each party.
STAGE 4 – The contract stage
The seller will prepare a business sale agreement which the buyer will need to review and negotiate. The buyer’s lawyer will review the Seller’s draft business sale agreement and make sure that is contains all the agreed terms and check for any clauses that are unusual or onerous or need amendments.
Negotiate other terms of sale: The business sale agreement will cover other important issues that will not yet have been agreed between the parties when making the initial offer. These will get fleshed out between the Seller and their lawyer who will recommend the best course of action and then negotiated with the Buyer’s solicitors. In our experience these will include things such as:
- Period and geographic area of the Seller’s Restraint of trade
- Adjustments for Employee Entitlements
- Apportionment of Purchase Price
- Refund of deposit if certain conditions not met
The business sale agreement often contains special conditions which will benefit the seller and the buyer’s lawyer will need to give attention to these in particular.
Exchange of contract:
Once the business sale agreement has been agreed the parties then sign it – this is known as exchange of contract.
The Buyer is required to pay the deposit on the signing of the contract.
The contract is now binding and the buyer and seller are under an obligation to proceed towards settlement.
STAGE 5 – Settlement
Your advisory team will ensure that you have thoroughly checked that everything is completed and correct before sealing the deal! The following steps are commonly completed by the buyer within the settlement stage, but these steps can differ depending on each unique business purchase:
- If stock is not included in the business purchase price, the buyer will need to go through the stock with the seller and calculate how much stock there is and what it is worth. The stock take is generally done the night before settlement.
Assignment of the Lease
- If the business you are purchasing is a premises-based business, a main part of settlement will involve the assignment of the lease from the previous business owner to the buyer. This means that all lease obligations will be transferred to the buyer, and they will become the new registered lessee.
Business name transfer
- The buyer and seller will need to ensure that the business name is transferred through ASIC. Your lawyer will advise you how to do this.
Equipment hire transfer
- If there is equipment being hired for the running of the business, the buyer will need to ensure that the owner of the equipment has been contacted to either transfer the equipment to the buyer, or have the seller pay out the equipment hire contract. Any security registered on the equipment through PPSR will also need to be released.
- The buyer will need to ensure that the seller has notified each employee of the ownership change, and whether their employment will be terminating or continued. Also, the buyer will need to check that all employment entitlements have been paid out correctly so that these costs don’t fall onto the buyer down the track.
Payment and final transfer
Once the buyer pays the seller, they will receive the keys and any relevant documents off the seller. The buyer then becomes the new owner of the business!
Please note that these steps may be different depending on each unique business purchase. If you need assistance with purchasing a business, Rise Legal can ensure that all procedures are undertaken risk free.
For assistance, get in touch today.