6 Key Legal Stages of Buying a Business
Whether you’ve purchased a business in the past, or this is your first endeavor, the buying process can seem overwhelming or disjointed. Similar to buying a house, if you know the steps ahead you can prepare, coordinate and understand what your implications are at each stage. Knowing this will alleviate stress and confusion and give you the best possible shot to navigating your way toward becoming a business owner.
First things first, consulting a lawyer or legal representative is crucial throughout this process. They are equipped with experience and know-how to ensure contracts are transparent, figures are correct and nothing is missed when purchasing a business. Hiring legal help is for your protection and ensures you don’t make a purchase which could see you acquiring large amounts of debt via a business that wasn’t as it appeared.
Purchasing a business requires you to go through a legal process to transfer ownership. We’ve outlined the six key steps you can expect to get your business purchase over the line.
Confidentiality agreement
The current business owner or broker will usually request you to complete a confidentiality agreement before any additional information is shared about the business. Typically, the information that is provided through their advertising is the first stage of information. If you want to know more, you will need to sign the agreement. This is in the best interests of all parties so that important information, particularly financial, isn’t provided to the general public. Once you have provided the signed confidentiality agreement, the seller will usually provide more information and invite you to come to visit the business.
Offer and Acceptance
This is when you (the buyer) offers to purchase the business for a certain price. This should be in writing so there is no confusion and the terms are clearly outlined. It’s important to include information such as price, whether you will perform due diligence (this if strongly advised by professionals), assets that are included, whether there is any finance that is required (i.e. subject to finance), will it include transfer of employees (if applicable), any necessary training, any restraints on trade for the current owner (to prevent them re-opening a new business), etc. It basically outlines what you as the buyer require to purchase the business. The seller then needs to decide if they accept these terms. There may be some negotiations.
At this point, the seller may request a deposit, especially if they are releasing confidential information. It is a good idea to have a third party hold this money (such as lawyer, broker, real estate agent).
Depending on the business you are buying, the seller’s circumstances, the state you live in, - the process of due diligence may be performed before making a deposit, or after. Every business sale is different.
Review the Contract
The seller’s lawyer will prepare a contract based on the general offer that you have made and the seller's terms. It’s important you also have a lawyer engaged for the negotiations and to check the draft contract once it has been prepared. The seller will often have the contract written in their favour, so you need a lawyer who can understand and negotiate for you. The contract needs to be clear and concise.
Negotiate and Exchange
This is where the lawyers negotiate on certain sections of the contract, until an agreement is made, and the contract becomes final and ready to be signed (executed). Similar to buying a property, once the contract is signed by both parties and swapped, it is exchanged. The deposit is then required. You can then perform due diligence (some business owners may allow you to start performing this earlier).
Due Diligence
This process usually requires assistance from the seller to provide all the information. The buyer can then go about investigating the business to ensure that everything the seller claimed is accurate. It is vital that the buyer engages professional assistance during this process - the more people that are involved the better the chance any irregularities will be noticed. You want to be confident that the business you are purchasing is what you are expecting, and you are paying the price it is worth.
Settlement
There will be a settlement date set in the contract exchange. You have a certain of days to complete your investigations and ensure everything is ready for transfer on the settlement date. This is typically handled by the lawyers, but it’s important you understand everything that you will need for the settlement to go through. This will vary depending on the business you are buying but can include transferring business names, domain names, assets, telephone accounts, client lists, website hosting, lease agreements, and employees. Once everything has been finalised, settlement requires the transfer of final payment.
This is a guide for a business sale, but is not conclusive, every business sale is different and every state has slightly different laws pertaining to the sale of businesses. So it is imperative you seek professional legal advice before buying a business.
If you’re interested in purchasing a business, download our free eBook specifically tailored for business buyers.
