16 MAY 2013
There are many things that need to be carefully considered when deciding whether to purchase a business. This is to minimise the risk of handing over a cheque at settlement and then finding out something later which makes you say, “If only I had known about xyz , then I would never have agreed to what I did”.
To lessen the risk of “buyer’s remorse”, in our experience the following tips have been very helpful to our clients:
- In the same way an aircraft pilot navigates from the map to the ground rather than vice versa, a due diligence should start from the profit and loss statement and balance sheet and navigate backwards from there. In doing so, it is important to obtain an understanding of the underlying reasons why the business has recorded the results it has and whether those results are sustainable. A good legal document will not make up for poor due diligence.
- While a heads of agreement is useful in identifying the agreed commercial terms, care should be taken when considering whether to sign a heads of agreement that is legally binding. This is because it is inevitable that a buyer will require other terms and protections to be included in the final contract (for example, appropriate warranties). Once a cunning seller has a legally binding document with minimal buyer protections to fall back on, the buyer usually has little leverage in negotiating into the final contract the protections that it requires. Care should also be taken in dealing with the seller’s agent who has a commercial interest in “locking-in” buyers to complete the transaction.
- It is important that buyers take the time to think about the warranties they need from the seller. If something was unclear during the due diligence or is so critical to carrying on the business, then it is prudent to include warranties which provide further protection in those areas and clear rights of termination if they are not accurate.
- Appropriate non-compete protections also need to be considered. It is not uncommon for us to see business sale contracts which only restrain the seller company from competing, meaning the directors behind the company are technically free to set up in competition with the buyer’s new business. This could quickly diminish the value paid for the business.
If you are in the process of buying a business, we would be pleased to share with you other valuable tips and tricks gathered from our extensive experience in these transactions.
You are a valued Kinneally Miley contact, for more information related to this Legal Update please contact us.
[contactsbox] [leftcolumn]Contact Partner: Francesca Petroccitto
Direct Telephone : 07 3210 5771
Mobile Telephone : 0402 293 644
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