There are many advantages when buying an established business. Not only are you purchasing a fully functioning business, but you also benefit from purchasing an existing customer base, set supply chain, assets and inventory.
In this blog we share some legal tips provided by our fixed-fee commercial lawyer, Avanthi De Alwis, on how you can minimise your risks when purchasing an established business and hopefully ensure that you purchase the business for the right price!
Head of Guarantee
Before signing a contract to purchase an established business, you may want to consider asking for a head of guarantee clause to be included in the terms. A head of guarantee is essentially a trial period where you can observe the daily workings of the business for a limited period of time. This can be advantageous as it helps to ascertain whether the minimum takings of the business that the vendor has represented in the contract is in fact correct, and in the event that it is not, it may mean you can negotiate a reduction in the purchase price.
A Head of Guarantee is also a further way to gain an understanding of the day-to-day operations of the business and can provide you with an opportunity to speak to employees and suppliers, obtain feedback from customers, check out the equipment and other assets, and gain a better overall understanding of the business you are purchasing.
Minimise Your Risks
Avanthi cautions, however, against using a Head of Guarantee as the sole means of decision making when purchasing an established business. Avanthi strongly recommends obtaining financial advice from a financial professional, and to complete the proper due diligence prior to signing any contact to purchase an established business.
Avanthi also cautions that some vendors may inflate sales during the trial period, so it is always good to take seasonal fluctuations into consideration. For example if you are purchasing a small café with a large alfresco area in the summer months, this may mean that minimum takings are a lot higher than perhaps they are in the colder months and you need to make an adjustment for this fluctuation.
So if you are thinking of purchasing an established business we recommend you get in touch with a commercial lawyer. If you would like to book a Quick Match or request a quote, please follow the links on the Legally Yours website.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Legally Yours Pty Ltd accepts or assumes responsibility, or has any liability, to any person in respect of this article.