Buying a business – buyer beware?
As with any investment, it pays to know and understand as much as possible of your potential business venture. Particularly when your client is considering buying a business.
At the core, it is up to the buyer (and their advisers) to make sure they are buying a profitable and sustainable business.
Due diligence is a must in our current economic landscape as some business owners may endeavour to present the financial outlook or performance of their business in a favourable light. It is up to the prospective purchaser to ensure the business is truly performing as expected.
To get a good return on your client’s investment, the business needs to be fully analysed and the right questions need to be asked. If in any doubt whatsoever, the prospective purchaser should simply walk away.
Being thorough is absolutely crucial.
Knowing and understanding what a business is truly worth will not only give your client the confidence to offer a realistic and fair price for the business, it can also prevent some serious and unnecessary financial ramifications in the future.
So what’s the best way to purchase a business?
There are generally two ways an investor goes about acquiring a business:
- buying the assets of the business
- buying the shares of the company that owns the business.
Which option is best for your client?
Here a few things to consider, but this is an excellent opportunity for lawyers and accountants to work together to pinpoint the best option for their mutual client.
Businesses are often divided into three parts when they’re valued:
- tangible assets (such as premises, machinery and vehicles)
- stock (such as materials and supplies)
- intangible assets (such as exclusive contracts and patents or goodwill)
For smaller businesses, this is the most common option as it allows the buyer to avoid any inherited historical issues, or claims that might be made against the business. In short, the buyer acquires the assets and not the liabilities of the business.
The buyer, however, must understand what securities (if any) have been registered over the assets of the business and ensure those securities are released at the point of sale. Failure to do so could lead to those assets being repossessed by the secured party if it turns out the original company is behind in their obligations.
The other approach is to buy shares in the company that owns the business.
The mechanics are much easier as the buyer simply buys the shares of the legal entity that owns all of the business assets.
Buying shares virtually eliminates the need to transfer title to all of the many different assets used in or by the business. It can also eliminate the need to transfer, renegotiate or reapply for things such as permits, utilities, facilities leases and employment agreements.
However, the possible downside for the buyer with this option is that the buyer is then inheriting any undisclosed liabilities associated with the business.
When determining the value of a business, a professional should always be involved. Knowing what questions to ask is critical to ensure, not only that your client is paying the right price for the business, but that it remains a business worth buying. As chartered accountants, Gerry Rea Partners works with lawyers and accountants to arrange business acquisitions in ways that minimise risk.
If you have clients looking to procure a business and require assistance in gauging options, please email Simon at email@example.com. We’d be happy to help you find the best solution for your client.