5 Legal Questions to Ask When Purchasing a Business

by Jakub Grzybowski 1st of March, 2019

Purchasing a business can be a daunting task, rigged with legal pitfalls. It may seem like a clear-cut deal but as a buyer, you need to be aware of external factors that are attached to purchasing a business. Issues span across legality and interconnect with the business’s operation, financials, taxes, licences, and employment.

Here are five questions you need to ask yourself before you purchase a business.

1. Have you performed due diligence?

Prior to purchasing a business, it is imperative that you conduct due diligence of what you are buying. Due diligence refers to a comprehensive review of a business prior to its purchase. This includes analysing the businesses’ liabilities, assets, transactions and potential commercial value. It is recommended to conduct due diligence after initial interest has been shown in purchasing the business, but before any agreement has been signed. The consequences of not conducting due diligence may result in purchasing mistakes or unverified details that may lead to harrowing future implications for your new business. Accordingly, due diligence ties into assessing the financial attributes of the business.

2. Have you assessed the financial attributes of the business?

As this is not a new business, the business you are buying will have preconceived financial features. Looking at these financial attributes will include assessing the business from an economic perspective and highlighting prospective financial trends, risks and projections. As a general financial outlook, you gather this information:

* Annual financial statements - including income sheets and balance statements;

* Accounts receivable;

* Sale reviews of products or services;

* Assess the business’s inventory, equipment and real estate;

* Analyse and compare past and future projections;

* Obtain all tax details related to the business;

* Obtain information on all current shareholders and creditors;

* Assess all debt of the business.

Compile this information to determine your current financial viability and see whether you are able to undertake the financial risks associated with purchasing your business. It would also be advisable to assess tax laws surrounding such a business to mitigate against any tax risk. Alongside the financial attributes, it would be prudent to look to the operation of the business.

3. Have you analysed the operation of the business?

The operational structure of the business will look to the business model, economic competition and market influence. This will tie into your financial concerns by assessing whether the business as a ‘business’ is sustainable. Some key points to consider here include:

* Assess consumer purchase patterns, including popularity, time of purchase and repetition of purchase;

* Analyse the business’s previous marketing tactics and its success;

* Research the current market, industry trends and the product or service’s success dependent on demographic, societal and economic factors;

* Assess the public perception of the business;

* Study potential competitor's and their method of operation;

* Investigate the businesses service or product, its profitability and potentiality for development.

By properly understanding the operation of the business you will find it easier to combat any issues in the market as well as integrate your own influence for the business to thrive. In order to seamlessly transition into your new business, you must be aware of the current employees of the business.

4. Have you assessed issues concerning current employees?

When purchasing a business, you must determine whether you will take on the current employees. It is common for employees to continue with their employment contract irrespective of the sale of the business. However, depending on the method of transfer you may need to create new employment contracts with each employee to correctly adhere to legal principles. A few recommendations would be to:

* Collate the current employee's details, including earnings, skills and qualifications;

* Compare your business’s employment with the industry;

* Assess the company’s fringe benefits;

* Learn the benefits and deficits of the current company policy.

With a proper understanding of the current employment policy, you may find it beneficial to amend this policy to improve operation and function. Ultimately, all these issues are underpinned by legal implications.

5. Have you considered all legal implications?

Certain legal checkpoints overlap with the aforementioned questions. To effectively purchase a new business, it is essential to also look at the legal status of the business. This begins by assessing whether the business is engaged in any existing contracts. Ideally, you should look over all the copies of contracts with a primary focus on leasing agreements, business registration documents, purchase and distribution agreements, employer contracts, intellectual property contracts, and client agreements. It would be advisable to have a business lawyer look over these documents to identify any potential risks and liabilities. By knowing your risks and liabilities as a buyer you will be benefited by having the ability to negotiate the purchase of the business or obtain certain indemnities.

Factoring in legal concern also extends to licences, permits and the registration of the business. It is necessary to assess this as a non-current licence or un-transferrable permit will inhibit your operation of the business. These documents may also be left out of the sale of the business so it is up to you to determine whether they will be included in the sale. Moreover, this will affect how you purchase the business premises. It would be advisable to consult a leasing lawyer to consider the differing rights and responsibilities and their effect on your finances and operation.

Conclusion

It is your duty as a buyer to conduct a review of the business prior to purchase. This will include assessing the businesses finance, operation, employment and legality. It is imperative that you ask these five questions for a smooth transition and to prevent against any uncertainty or potential future detriment.