By Law Squared
Buying a business is a lot like buying a car. It can look great, and it can feel great to drive but there's a lot of things behind the scenes that you need to consider. Due diligence might not be the first thing you want to dive into but you do need to pop that business hood, take a good hard look and make sure that you're not driving away in a lemon.
A commercially savvy lawyer will usually start by looking at these agreements to find out if all the essentials stack up. Due diligence is the process of gaining access to and reviewing the business' strengths and vulnerabilities, usually coming into play after you have agreed to deal with each other, but before signing on the dotted line. It determines whether the risks associated with the business are worth the potential return that you're putting your hard-earned cash towards, to buy in.
The main aspects of a business are its operations, financial performance, intellectual property, business assets and relationships with suppliers, customers and other stakeholders. This article will assess three main areas which you, as a prudent owner, should turn your mind to before launching into a purchase. These are:
the suitability of the business;
the types of agreements needed; and
the numbers behind the business.
The suitability of the business
Businesses do not come in a one-size-fits-all model. Neither are people, and this is a good thing. When contemplating the type of business that you are looking to purchase, contemplation should be given to the intangibles - that is, ensuring that the business aligns with your values, your work preferences, your personality, and your strengths and weaknesses. This critical idea is important as it helps to identify the style of work that would be required in your ownership. Whether you'll be a silent owner, or running a crew of staff, the business should be one you believe in, that you're willing to sink your energy into, and that works around your family and work norms.
What is your house made of?
As the fable of the Three Little Pigs tells us, your house is only as strong as you make it - is yours made of sticks and straw, or is it made of bricks? The business structure and the agreements behind it are what hold it in place. This is not something to skimp on. To get started, think about who else will be involved with you in the business, including financiers, partners, shareholders, and potentially an advisory board, but these are just a few to ponder on.
Having the right structure or creating the right structure for the business to operate in, can be the determinant of success early on.
The numbers behind the business
When you're considering buying a business, there is a range of important legal and tax question you will need to answer throughout the due diligence process. It is then a good idea to consult professional advisers to help you through this.
For example, you need to make sure that before you make the plunge and launch yourself head first into business ownership, that everything in the background adds up. There are a range of questions that you can ask to elicit this information, and make sure that everything is as it's represented:
What kind of outgoings does the business face.?
What do the current sales, profits and attached costs look like?
Are there any opportunities in the business that aren't being capitalised upon?
Are there any headwinds which stop the business from achieving its full potential?
What kinds of licenses or transfers for property (intellectual and physical) are required?
Do you need to have the books looked over by an independent specialist?
Getting all the information in one place is essential, and making sure that everything is accounted for is a important consideration to help make an objective decision about buying a business.
Running off into the (capital gains free?) sunset
Eventually, you yourself may want to sell the business. Thinking about your time frame for any potential sale will help determine what kind of impact you can have on the business, what actions you are going to implement, how much debt you are going to take on and any expansion plans you can put in place. It is also a good time to think about capital gains tax and any stamp duty implications that your plans may have in the future.
Accountants can assist with this process, including making a valuation on the business, and in answering some of the queries mentioned in this article. An independent accountant is helpful to substantiate or question the seller's view of the business, and make sure that you get a fair price.
There's more than a few items to consider when taking the step to buy a business; however the above gives you some fundamentals to start with and work through prior to buying. Law Squared has a wealth of experience with startups and commercial law, and can help you plan your next move in a strategic and methodical way.
At Law Squared, we partner with passionate entrepreneurs and businesses who need our technical help and expertise. We’d love to have a chat with you, so feel free to drop us an email at firstname.lastname@example.org.
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