A Step-by-Step Guide to Purchasing a Business

Introduction

Purchasing a business can be an exciting but complicated process. It is important that you understand the process of purchasing a business and obtain the necessary advice from your legal and financial advisors.

There are certain risks involved with purchasing an existing business, however if these are carefully managed, you can reap the benefits of acquiring an established customer base, operational systems and brand recognition.

This article provides an outline of the key steps involved in purchasing a business. By understanding the process involved and seeking the right professional advice, you can feel confident and navigate your business purchase to ensure long-term success.

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Steps for Purchasing a Business:

The process of purchasing a business can be broken down into the following key steps:

1. Identify your ideal business;
2. Conduct research into the business;
3. Secure finance;
4. Make an offer and negotiate terms;
5. Conduct formal due diligence;
6. Enter into a contract of sale;
7. Transfer assets and licences;
8. Settle the purchase; and
9. Complete handover and fulfil obligations.

Identify your Ideal Business

Before purchasing a business, it is essential to research the industry, assess your budget and clarify your long-term goals.

During this period, you can research market trends and the availability of businesses for sale.

It may be worth contacting a business broker who will help you find businesses for sale. They can be beneficial in that they can provide additional access to businesses that are not yet on the market or that are silent listings (i.e. not publicly listed for sale).

Conduct Research into the Business

If you find a business that you are interested in purchasing, you should conduct your own preliminary research as to the nature and success of the business.

This research will give you an understanding of the business, what experience you may require, the performance of the business and the reputation of the business. This may include research into the business’ social media accounts to understand its customer base, reach and reputation and research into potential licences or regulations that may affect the business.

Secure Finance

If you decide to proceed with the purchase, determine your financing options. Your finance may be through personal savings, loans or investors.

Before making an offer for the business, you should speak to your bank and your financial advisors. It may also be worthwhile to explore available government grants or small business incentives to assess your eligibility.

Make an Offer and Negotiate Terms

Based on the above steps, you may choose to make an offer on the business. Your offer should be informed by your research and the guidance of your advisors.

To proceed you will need to submit an offer or a letter of intent to the seller and/or their representative.

After the offer is made, there is likely to be negotiations of the sale price, the payment terms and the conditions of sale.

If your offer is accepted, signing a Heads of Agreement can help outline the key terms before the official contract is prepared.

A Heads of Agreement can be prepared by your solicitor or a business broker.

You can find more details on Heads of Agreement here.

Conduct Formal Due Diligence

Once a Heads of Agreement is signed, you can begin conducting formal due diligence on the business.

Due diligence is the process of examining and reviewing the business to assess its value and any potential risks involved. While you may have conducted some cursory due diligence by researching the business beforehand, formal due diligence will allow you to access details of the business not available to the public.

Since due diligence involves sensitive information, you may need to sign confidentiality provisions in a Heads of Agreement or a Non-Disclosure Agreement.

Standard due diligence includes reviewing or having your advisors review financial records, the legal compliance of the business, contracts and other key aspects of the business.

Enter into a Contract of Sale

A contract of sale will contain more specific and expansive terms and conditions than the Heads of Agreement. The contract will dictate all the terms and conditions associated with the purchase. It will cover the key terms such as the purchase price, assets, stock value and handover details. The contract will also include the necessary warranties and indemnities agreed to between the parties.

Based on your due diligence, you may negotiate additional terms, such as assigning key contracts.

It is best to have a solicitor review the contract of sale prepared by the seller’s solicitor to ensure that you are aware of your obligations and negotiate any terms that you do not agree with.

Once the parties have agreed to all the terms associated with the purchase, you will sign the contract of sale and make payment of the deposit. The seller’s agent, broker or solicitor will hold the deposit.

When both parties have signed the contract, it is exchanged (this is where both parties receive a copy of the fully signed and dated contract) and the contract becomes legally binding on all parties.

Transfer Assets and Licences

With the contract exchanged, the parties will each need to attend to their obligations under the contract. This will include preparing to transfer all the business assets and licences. Some licences may not be transferable, requiring you to obtain them yourself.

You may need to assist with the lease assignment or negotiate a new lease for the premises.

During this period, you should also attend to obtaining the relevant insurances for the business as these will not be transferred with the purchase.

Settle the Purchase

Settlement will occur on a specific date, or once certain conditions stipulated as being conditional for the purchase are completed. Examples of pre-settlement conditions include the successful assignment of the lease.

On the settlement date, you will need to attend to making payment of the balance of the purchase price which may vary depending on any adjustments that need to be made for employee entitlements, stock take or other items as stipulated in the contract.

Once you make final payment, the seller will hand over the business and you will officially become the new owner.

Complete Handover and Fulfil Obligations

Just before or on settlement you will be provided with all the operational documents necessary to run the business.

Depending on the contract terms, the seller may be required to assist with training before and after settlement. This is to ensure a smooth transition.

At this time, rely on your advisors and the seller (if agreed) to help you run the business and ensure its long-term success.

Conclusion

Purchasing a business can be a daunting and significant investment. By following the guide above and engaging experienced legal and financial professionals throughout the process, you can minimise the risks involved and set yourself up for success.

By preparing thoroughly and seeking expert advice, you can confidently acquire a business, minimise risks and set yourself up for long-term success.

Additional resources

Frequently asked questions