What should you look for when you are negotiating the purchase of a business?
Here are some key points:
- Purchase Price:
Have you received advice regarding the value of the business? There are a number of different methods of valuing a business, some of which are suitable for a going concern sale, and others more suitable for a liquidation sale.
- Settlement Date:
Can the settlement date be tied in with your balance date? Should you be aware of seasonal cashflow issues (e.g. shoulder season may result in a period of lower cashflow so don’t buy going into a shoulder season etc).
- Vendor Assistance:
Do you require the Vendor to be available before/after settlement for a period of time?
- Restraint of Trade:
What is a reasonable restraint of trade to have the Vendor agree to?
How long to go on the Lease? When is the next rent review? Is there a right to renew the lease at expiry? Are the current premises key to the business?
- Plant and Equipment:
Is it in good working order? Are all assets owned by the Vendor?
Does the stock include obsolete items? Should you include a stock value adjustment to allow for this?
What warranties is the Vendor giving?
Have you sighted the financial statements and GST returns of the Vendor business?
Does the business have good systems and customer records in place?
Should you include conditions to allow you to check things more thoroughly (e.g. Due Diligence)? Regarding your own financial arrangements, are they under control? Are you happy with the terms of any borrowing? What security does the bank want?
All these factors (and others) can have a bearing on the deal you reach with the Vendor. ALL of them can. The Price is not the only thing that can swing the deal.
Sometimes its more fundamental than that, and can be a simple case of timing. Maybe the Vendor wants out urgently for some reason. Maybe he doesn’t want to trade through another shoulder season, for example. You need to find the hot button.
Business or Shares
If we go back a step further, should you even be buying the business, or is there a case for taking over the business by buying all the shares in the Vendor’s company which runs the business?
Now you need to be very careful here because if you take over the company you take control of everything that is lurking within it – good and bad. That include any tax liabilities, payments under personal grievance claims, and anything else the company owes. Yes, in the Agreement we’ll get the Vendor to promise that there are none, and that if there are, he will pay you. But once the deal is settled, the Vendor could be long gone when something surfaces.
So you need to be careful. But it can sometimes be an opportunity. For example, if the company has tax losses that can be used to soak up future tax liabilities. If, with proper tax advice, you can structure the deal to retain these, then they have a value to you.
This is what we do at Queenstown Law. We are happy to discuss in detail, and look forward to hearing from you on firstname.lastname@example.org