Purchasing a business comes with fresh opportunities, but also many legal considerations that could catch you unaware. Due diligence is necessary to assess whether purchasing a specific business will end profitably or in disaster! In this article, we outline three things to consider when conducting due diligence from a legal perspective.
Performance
You should ask the current owner their reasons for selling the business and their plans for the future. This can give you an indication on whether the business is doing poorly because of mismanagement or low demand. If you know their plans going forward, you can decide on whether to include a clause in the contract of sale that prevents the previous owner from pursuing another business in the near future that will compete against yours.
Also be aware of any legal disputes that the business is currently going through—you don’t want to be paying damages for disputes you had no part in!
Assets
Assessing the assets of the business you’re purchasing means there will be no surprises when you start operations. This includes equipment, inventory, location, intellectual property, and more. Be aware of assets’ quantities, condition, and ownership. It is important to have a lawyer assist to help you consider Personal Property Security searches on the business and its assets, to check ownership of the assets, otherwise a third party might try to claim ownership of assets that you purchased.
You’ll also need to check insurance and leases for the business’ assets. Insurance for certain assets like equipment should last until the settlement of purchase. Imagine the insurance has just ended and a key piece of equipment breaks down right before you settle the purchase—repairing your newly acquired equipment will be another huge expense!
Intellecutal Property
Make sure the business that you’re buying has protected its name with a registered trademark. Also check that you will gain the rights to the trademark with the sale. In the case that the business does not have a trademark with its domain name, someone could send you a cease and desist, which means you may have to pay them for previous infringement and/or rebrand. This also applies to other intellectual property such as patents or design rights.
Contracts
There will be many contracts related to the business’ operations, including those with suppliers, clients, and employees.
Supplier contracts
Check that there are supplier contracts for any goods that you will be selling. If there are no supplier contracts transferred with the business purchase, there is no guarantee that the supplier will continue to work with the business. You also need to check for conditions of trade — what you’re expected to pay and in what intervals.
Transferring Sales/Client/Service contracts
Is there ongoing or future business already arranged that you will need to take care of once you’ve settled the purchase? Make sure you are happy with any obligations you may be required to perform and the remuneration under these contracts.
Employees
You may wish to keep existing employees of the business so that there is a smooth transition for the business’s clients and customers. If you keep existing employees of the business, you will need to honour their employee entitlements accrued prior to the date of transfer, like pay and leave. You will want to ensure these entitlements are reflected in the purchase price.
Leases
If the business you’re buying is a brick and mortar store with a lease, consider how long the lease is and what right of renewal you have. Is there another suitable location if you’re not able to renew the lease? Don’t fall in love with a business’ location until you’ve ensured that it will remain for the business!
What next?
Legal considerations for purchasing a business extend to far more than just performance, assets, and contracts. Your contract of sale can also include guidelines for the handover process and other administrative purposes. For help navigating your business purchase, contact us for a free, no-obligation chat.