Owning a business can be exciting, but the process of purchasing a business can be daunting, especially for first-timers.
It is very important for a purchaser of a business to understand what they are buying before committing to the purchase. Before you purchase the business, you (often with the help of professionals) will perform due diligence, which is enquiring about important aspects of the business. This will vary business to business. As a guide, due diligence may include:
- Whether the business has a healthy cash flow
- Where does the revenue stream come from
- How reliable are the financial records
- Are profits going up or down
- How big is the market for the business’ products or services – is it growing, shrinking or stagnant
- Are there any major new competitors in or coming into the area that could negatively impact earnings
- What kind of online presence does the business have, and how does it compare to its competitors
- If the business has physical assets, are they valued correctly and fairly
- Are there any hidden liabilities
- Are you buying the assets (only) of the business or the shares of a company
- Does the business have the required licences to operate
- Does the business operate from premises? If so, is there a lease and if so, when does the lease end
- Are there complete employee files including salary and benefits
A professional advisor can explain the implications of these points.
Subject to some exceptions[1], the law in Victoria generally requires that the vendor must provide a “Disclosure Statement”[2] to the purchaser prior to signing a sale contract, which document sets out information about the business. Although the Disclosure Statement discloses important information regarding the business including a financial report, it should not replace a purchaser’s own due diligence.
Once a purchaser has decided to proceed with the purchase, the purchaser should have the terms of the contract reviewed before signing. Regardless of the size of the transaction, there are always legal issues to consider which can affect the business and costs (immediate and future).
We recommend that you seek professional advice if you are considering purchasing a business and that you have the documentation reviewed before signing, to ensure that you are fully aware of your purchase before you commit.
If you have a question regarding a business transaction or your contract, please contact us at 03 9111 0078 or email us at info@scottlegal.com.au.
Liability limited by a scheme approved under Professional Standards Legislation.
[1] If the sale price over $450,000.00 or the business has a liquor licence are examples of where the vendor is not required to provide a Disclosure Statement, which is also sometimes referred to as a Section 52 Statement.
[2] section 52 of the Estate Agents Act 1980 (Vic).
