Are you considering buying an existing small business? We understand the appeal! Being able to bypass any potential start-up woes and tribulations and skip to buying into something that already has an established customer base and brand identity is an enticing idea.
To ensure your business purchase is successful, we encourage you to evaluate the following five aspects of the business you intend to buy:
1. Business Framework
First and foremost, you should conduct an overall evaluation of the business you want to purchase and research the industry thoroughly. The business might have good financials right now, but if it is operating in a declining market, this could signal problems in the future for the business.
Look at the following aspects of the business:
- Customer stance & feedback (use customer reviews to measure the popularity of the business)
- List of customers and suppliers
By evaluating each of these factors, you should get a good sense of the overall business and how well it operates.
If you are considering purchasing a franchise, check out our blog covering the pro and cons of buying a franchise.
2. Real Estate
Check out the physical location of the business. Whether it’s a retail space, warehouse or office- check that it is in good condition. Are the equipment and inventory well taken care of, and are they included in the sale price?
Is the seller leasing the location where they currently conduct their business? If so, you need to find out the following:
- How much time remains on the current lease
- Can you assume the lease (preferably without an increase in rent)
- How much is the security deposit
If the business is an online venture, then evaluate the following:
- Website hosting
- Security and infrastructure
3. Operational Logistics
Assess how smoothly the business’ supply chain works. Are they located in an urban or rural location? Some parts of BC have extreme weather conditions in the winter. Could this cause an issue in your supply chain?
Another vital aspect to consider is the company’s relationship with its suppliers and vendors. Is it in good standing? If so, can they introduce you? Are there existing contracts you can take over?
4. Standing Liabilities
Ask to review the existing businesses financials and find out if they have any debts to pay. Any outstanding debts or nonpayments might be an indication that the business is unstable and not a viable business. If there are existing liabilities, ensure that your purchase agreement is drafted properly to ensure that you do not assume them.
5. Legal Agreements
What legal documents are in place? It is important that you closely examine existing legal documents and contracts that the business already has in place to ensure no future conflicts occur. Look over the following types of documents to avoid future inconveniences:
- Employment agreements
- Insurance policies
- Customer and supplier contracts
- Lease documents (if applicable)
If you have scrutinized over every aspect of the business and their legal documents and you still want to make a purchase then you as the buyer are responsible for preparing the purchase documents. These documents can be complex so ensure you contact a small business lawyer for help.
Documents for purchasing that you may need to prepare are:
- Letter of intent/ term sheet: A document that outlines the basic deal early on
- Purchase agreement: A more complex document detailing everything connected with the purchase
- Landlord consent (if you’re taking over a lease): If the business premises are being leased, you will need the landlord’s consent to get the lease transferred or assigned to you
- Closing documents: The actual transfer documents that get signed on the closing date of the sale
If you’re buying a small business, then we recommend having a small business lawyer review your documents to ease you through this process. Here at Benchmark Law we can help facilitate the sale or purchase of an existing business.