Due diligence when buying a business

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When you want to buy an existing business, it’s hugely important to know for sure that the business you have your eye on is indeed profitable.

You’ll have to carefully establish that the projections of potential earnings that the seller has provided are achievable and realistic. That’s why you need due diligence.

“Essentially, due diligence is doing your homework and thoroughly investigating the business before you commit to buying it,” says Paula Lines from The Law Shop. 

“You’ll need to get accounting advice on the past performance of the business, research council requirements, forecast future turnover and profitability, go over the lease and all other contracts, and check the condition of all the assets you are purchasing,” she explains.

Paula Lines, Commercial Lawyer at The Law Shop

“Your accountant has to check the financial records of the business you want to buy, including annual accounts and any management reports for the past three to five years.

“Potential tax implications of the purchase need to be explained, as well as the best ownership structure.”

Paula or one of the other Business Law specialists at The Law Shop can be consulted to review the sale and purchase agreement itself, as well as the various contracts that the business you want to purchase is party to such as the lease, agreements with suppliers, employment contracts and terms of trade.

“We can check if all the licences and certifications that are needed to operate are in order, and we can look at registered intellectual property rights such as trademarks and make sure they are being transferred to you,” Paula says.

Some of the information that you’ll need to access for the due diligence process can be sensitive, so the seller may require that you sign a confidentiality or non-disclosure agreement.

This is common practise but do make sure that the agreement has been reviewed by your lawyer before you sign it.

You must also focus on the business’ viability. You should investigate what customers love about this business, and make sure that it’s included in the sale or otherwise built upon by you as the new owner.

If the previous owner’s skills and personality are key to the success of this business, you’ll have to make sure you are just as good if not better at providing that same service.

Paula explains that if you haven’t signed a sale and purchase agreement, you can just walk away from the sale if you aren’t satisfied with the results of the due diligence investigation.

You could also see it as an opportunity to negotiate a lower price, considering the matters that need to be dealt with to get everything in order.

“Due diligence takes time and costs money but if you don’t do it, you risk losing a lot more if you find out that the business doesn’t make the money you expect, or if you need to replace things soon after purchase,” Paula says.

If you are looking at buying a business and have questions about the legal side of things, contact The Law Shop by phoning 0800 LAW SHOP. The friendly team is more than happy to help.

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