Buying a Business

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A Couple of Important Things to Consider When Buying a Business

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The first thing to consider, once you have decided that you will be buying a business is the entity in which you are going to purchase the business.

Talk to your accountant: Should you form a company? As trustee of a trust? Or will you buy in your individual name? This question is important for tax reasons. Don’t be misled by a seller or agent who tells you this can be dealt with in a special condition in the Contract. If the special condition says you may change the buying entity, and you do so, the Office of State Revenue considers the Contract has been fulfilled according to its terms and you pay stamp duty on that Contract, as well as the next Contract with the correct buying entity. Double duty! Nobody needs that. So take the time to decide what entity you are using to buy the business before you sign the Contract.

Then, make sure you have special conditions in the Contract that allow you to investigate the financial viability of the business, the obligations of the business, the premises the business is run from and the equipment of the business (amongst other things). We call this “due diligence”. Again, don’t be fooled into thinking a standard form Contract already deals with all the enquiries you may wish to make. It does not and you may be left unable to terminate the Contract for reasons that are extremely important to you.

There are many things to consider in this due diligence period, and these may vary widely with the different type of business. For example, how important are the current suppliers to the business, and will the suppliers continue to supply you? Is it a family arrangement, or an arms length arrangement? What about the clients or customers of the business? Are they stable and likely to remain once the business is sold, or is the personality of the seller an important factor to the current customers? Other than the usual questions in relation to the books and records of a business, there may be questions that need to be asked that will vary widely with the type of business you are considering purchasing. This is why a well drafted due diligence special condition is essential.

Buying a business will be an investment for you, and not just a financial investment. You will be investing time and energy into the business and not taking time at the outset to ensure that the process is carried out with care and skill may leave you with the type of business you would never have considered had you been able to investigate as you should.

There are many other factors to consider when purchasing a business, and the above is just a snapshot. Before you invest your money, time and energy, please ensure you seek advice from an experienced solicitor and accountant. Refer to our website for more information about commercial and business law topics.

Should you wish to find out more about the process, please contact Jane Macdonnell of McColm Matsinger Lawyers.

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