You have made the decision to buy a business. What next? Any business you look to purchase will have some aspects that pose a risk or are not set up satisfactorily. The goal of engaging professional advisors is to identify any potentially risky aspects of a business in order to make an informed purchasing decision.
If you have decided to purchase a business for the first time, you may not have a regular accountant who specialises in business transactions. Take the opportunity to research different accountants to find someone who you work well with and has the relevant expertise. It is in your best interest to be proactive and start this process at the same time or prior to looking for a business to buy. During the purchase process, you may be relying on your accountant to review records and it is important they meet any deadlines. There may be other buyers who will require you to move quickly to make and accept offers and missing a deadline may mean missing an opportunity. You can test this reliability by requesting that your accountant responds to you by a specific date with the initial engagement aspects (such as quotes and initial advice). Within the accountancy field, there are numerous specialists and it is important to engage someone who can confirm the business valuation method and financial metrics of the business. Some of the aspects that dictate the price of a business include:
- the amount of annual profit generated by the business (EBITDA);
- whether the business is under management;
- whether the business has quality systems and processes in place;
- the amount of time left on the lease (if it is a premises-based business);
- business growth over the last few years; and
- the number of customers, and whether they are locked in under an ongoing contract.
It is just as important that you work with the right lawyer. Who this is will depend on the type of business you are purchasing and your concerns. It is best to make sure that the lawyer you engage has experience with the sale and purchase of businesses. Leasing, employment and contracts can also be a large component of setting up your new business and it is essential that the law firm you choose has this experience as well.
Speaking to a lawyer early in the purchase process is vital if you are concerned about a specific aspect of the business you wish to purchase. Some of these concerns may be dictated by the accountant and where the business derives most of its value. If the value comes from repeat customers, you will need a written and signed client agreement that locks in these clients. This client agreement will be transferred to you when you become the new owner. The client agreement should allow for assignment or novation to you (these are the legal terms for transferring the benefits and obligations of a contract). On the other hand, if the value comes from the premises then the lease is the key component. The length of the lease and any options should be long enough to get your return on investment.
Choosing the Right Approach
You need to engage the correct lawyer depending on the sale. Your lawyer should be both technically competent and commercially savvy. If you simply want to get the deal done, you should communicate this to your lawyer. If you are more concerned about risk, which may be highlighted by the due diligence process, then this also needs to be communicated. Your lawyer should request the appropriate amendments to the business sale agreement, specific to your goals and risk profile.
Under a business sale agreement, the seller provides warranties. These are promises that the seller makes about the business and its assets. It is important that these reflect the agreement between you and the seller. If you are relying on a number of representations made about the business, these should be captured in the seller warranties. Typically the seller will look to reduce these warranties and you will want to increase them.
This can be a lawyer or a specialised accountant who specialises in business structuring and corporate transactions. You need to ensure that you are purchasing the business through a tax-efficient entity for your situation (sole trader, trust, company etc.). The most efficient structure will depend on your plans and whether this will be to sell on the business in 5 years or continue to operate for 10+ years. They can make recommendations based on these plans.
Engaging your own business broker can be extremely valuable if you have not found a specific business that you are looking to purchase. Their importance when purchasing a business comes from their established network. You provide them with your key criteria and they can reach out to this network to find offers. They will also be aware of businesses that are not advertised for sale but are willing to sell.
Some of your business purchase criteria could include whether the business:
- is under management;
- is established in the specific industry;
- has a stable recurring revenue which equals a certain percentage total revenue;
- can demonstrate growth over the past couple of years;
- has 5+ years remaining on the lease;
- has quality systems and processes in place.
Your broker should have specific knowledge and experience with the type of business you are looking to purchase. This can be especially helpful where there is more risk involved such as with cash-based business or where clients are not locked into contracts. In addition to your accountant, they can also typically provide business valuations to confirm the seller’s valuation method.
If you want to reduce the risks involved with purchasing a business, it is important to work with the appropriate professionals. These can include business brokers, accountants and lawyers. You need to have a good working relationship with these advisors and be confident that they will clearly and promptly communicate with you. While the sale process can be long, certain aspects may need to occur swiftly and your various advisors will need to meet key deadlines. The purpose of engaging advisors is to both highlight and reduce the risks associated with purchasing a business. With a quality team behind you, the sale process can be smooth and enable you to make well-informed decisions about the business you wish to buy.