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Buying a lemonade stand? Make sure it's not a lemon

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Ben Coleman
01-Apr-2017
Commercial Law

Being your own boss seems like an attractive option however if you are looking at purchasing a business which has already been established there are some key matters which you should turn your attention to before deciding to take such a big step. First of all, you need to know exactly what it is you are buying and what it’s worth. Every business has tangible assets such as plant and machinery which are relatively simple to place a value on. It’s the intangible assets such as goodwill, customer and supplier lists, intellectual property including trademarks and patents, key employees and reputation which need to be looked at very closely in order to ascertain the business’ true worth.

A thorough due diligence investigation also needs to take place in which you would establish the answers to important questions such as whether the assets and stock in trade of the business are owned by the vendor and whether they are subject to securities; what the terms of supply contracts are and whether they are favourable; whether the business faces any current or pending litigation or compliance issues; what is the profitability of the business and is it consistent; does the business have a good reputation with its customers and suppliers; and what are terms of the lease.

You may or may not wish to retain the existing employees of the business and it will be vital to engage in an analysis to determine which of the employees are imperative to the ongoing success of the operation. It is a good idea to talk to those employees about their future plans.

Understanding the implications of tenure on the premises is important. Usually businesses lease a premises, and in this case, you need to know how long the lease runs, what the rental is, when the next rent review will take place, what your obligations as lessee will be and whether the premises is in need of repair.

It is also essential to secure vendor warranties wherein the vendor represents to you that the business turns over a certain amount of revenue each year; that the assets of the business will be unencumbered on settlement date; that the vendor is restrained from trading in a similar business within a certain territory post settlement; that the goodwill of the business will be preserved until settlement date and the vendor will assist you for a number of days post settlement in terms of helping you run the day to day operation.

Creating a suitable ownership structure for the business is fundamental whether it be a company, a partnership or as a sole trader and taking tax advice from your accountant is crucial, including registering for GST.

Being a business owner is not a 9 to 5 job, it takes an immense effort to ensure that ‘business as usual’ ticks over. Not only is there a responsibility on a business owner to look after his/her customers and employees, but also to comply with a host of tax, legal, environmental and local government considerations. If you are ready to tackle this task, then go for it, but look before you leap!