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Buying a business - legal and financial advice

Buying a business is a serious undertaking and it is important that appropriate legal and financial advice is sought prior to signing any documentation.  The franchisor or business seller should be prepared to provide you with sufficient information to conduct a due diligence in respect of the business.  You should be wary if they're reluctant to do so. 

We provide a checklist of due diligence that may assist you.  This is not comprehensive and is not a substitute for obtaining independent legal and financial advice from qualified advisors.

Does the business have a good reputation?  Check with customers, suppliers and credit reference associations.  You can also search the business on the internet to ensure that there are no undisclosed adverse issues

Review the ownership documentation of the business including conducting company searches and business name searches to verify the vendor

Obtain a comprehensive list of the assets being sold and verify the condition of the assets and that they comply with all relevant regulations including occupational health and safety.  Are the assets adequately insured until settlement?  Are you able to obtain similar insurance?

If any of the assets are leased, are the terms reasonable and can you take over the existing leases or will they be paid out by the vendor?

Obtain a list of employees including full salary and entitlements so that you can verify the employment costs against the financial accounts.  Will key staff continue employment with you?  What if they don't?

Obtain a list of intellectual property including all trade marks, patents, brand names, logos, etc. and verify ownership of these

Have you checked with the relevant authorities in relation to permits or licensing obligations in respect of the business or the premises?  Are the permits and licences transferable?

Does existing stock include old, unsaleable or items that no longer fashionable?  Have existing stock levels been run down?  If so, you may need additional cashflow to build up to a reasonable trading level.

Will you be able to increase sales with current resources?

Obtain a copy of the lease to any premises that is relevant to the business to determine there is sufficient tenure to operate the business and that the terms are otherwise in accordance with market conditions.  Will any new or planned developments nearby affect your trade?

Obtain financial accounts in respect of the business for the previous three financial years.  How realistic are historical costs as a percentage of sales?  Would your cost structure differ greatly?

  • Review customer lists to determine the strength of the relationship between the customers and the business
  • Review material contracts and determine whether those contracts can be transferred to you
  • Obtain confirmation that all taxes and WorkCover premiums are up to date
  • The draft Contract of Sale should include comprehensive warranties provided by the vendor and its directors as required by your advisors
  • Does the Contract of Sale include a restraint of trade clause binding the vendor and its directors to not compete for a period of time and within a certain distance of the business
  • If the purchase is subject to approval of finance by your financier a relevant condition should be incorporated into the Contract of Sale

Have you obtained legal representation from a qualified practitioner for the Contract of Sale, leases and other ancillary documentation and in respect of transmission of employees?
 

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Author: ABSC

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