How to avoid hidden issues when buying a business

Buying a business can be one of the most beneficial financial decisions you make. This is because you are not only purchasing the ability to practice in that business, but you are also purchasing an established client base, staff and location, which means you have essentially jumped into an already established business where all the hard work of building it up is off your plate. However, buyer beware. Often, there are hidden issues within the business that reveal that it may not have been the best financial decision you could have made, causing you to put more money into the business to solve the issues.

Due diligence

One of the biggest issues is not utilising due diligence. Due diligence is essential to determining whether to purchase a business as it allows you to examine the business finances, customer base, assets, and employees. Without due diligence, you leave yourself vulnerable to hidden issues the business may have, such as unpaid debts. Utilising due diligence includes involving external consultants and advisors, such as an accountant, financial advisor, and/or a lawyer.

Workplace culture

As you are purchasing an established business, the workplace culture of the business is already ingrained. It is crucial to pay attention to the workplace culture and determine early on whether you would like to keep it or change it. Don’t be afraid to change the culture if the business is not operating in the way you believe it should to maximise gains.

Employees

Take a measure of staff morale. If it seems low, find out why that is. Often employees with low morale and loyalty to a business have worked under conditions that are difficult. If you intend to keep the employees, aim to increase their morale by changing their work conditions. A risk of having unhappy employees from the business is them leaving and taking intellectual property or clients with them. Therefore, identify who the key employees are and check if they have a restraint of trade clause in their employment agreements.

Machinery

Keep an eye on aging equipment and machinery that will need replacing. You should ensure that whatever you are buying is in good condition to last another five to ten years. This includes up to date warranties without the requirement of major repairs. If equipment is leased, ensure the lease can be assigned to you and that on-going maintenance is part of the lease. If the lease cannot be assigned, consider leasing new equipment.

Competition

It is crucial to identify and investigate key competitors within your business sector. Take note of their strengths and weaknesses, their growth and threat to your business. This is better done through comparing their profitability, earnings, prices, and costs. Importantly, investigate the industry trend as a whole to identify if it is growing or slowing down. Consider economic factors. This is especially important during the era of COVID-19 as if the economy slows down, how will this affect your business?

This information can be found from industry associations, government departments and the Australian Bureau of Statistics, or seek specialist advice from consultants, industry bodies and business brokers.

Legal rights and obligations

To avoid running into legal issues, investigate and review government regulations that apply to the business and determine whether it has the relevant permits and licenses required to operate.

Other legal issues to consider include:

  • whether arrangements will be made for existing employees of the business;
  • whether any leave entitlements, or compulsory superannuation are required to be paid to employees transferring with the business;
  • if intellectual property is protected through the correct licenses, patents, trademarks and registrations and whether these rights will be passed on with the sale;
  • what your financial obligations are, such as royalties, marketing levies, equipment fees, stock, rent and refurbishment obligations and services and hire agreements;
  • when the license expires;
  • whether the business has any liabilities; and
  • whether you need guarantors for any loans required.

Why is the business for sale?

Before purchasing a business, it is prudent you seek out the answer to why the business is being sold. Are the current owners wanting a change in lifestyle? Are there financial issues? Has the business’ market share been taken by a competitor? Investigate before committing to the purchase.

How we can help

The considerations to be made before purchasing a business can seem endless. The above considerations are only a few. At Cohen Legal we can assist you in making those preliminary steps before purchasing a business and drafting and/or reviewing contracts.