Starting from scratch is not the only way to go. There are many examples of how even buying an existing company has been less risky than setting up your own start up. Buyers can rely on the brand’s goodwill, steady customer base, key managers who are familiar with the business inside out. However, one has to understand that Buying the right business can make or break you. In order to avoid any breaks, the buyers shall perform due diligence about the business they are planning to buy.
Due diligence is the research that a potential buyer does to assess the viability of a purchase of a business entity. If due diligence is not properly completed, you may be in for an unpleasant surprise after the contract for the purchase of the business is formed and it becomes too late for you to change your mind about purchasing the business. For example, you may discover that the business may have committed to onerous contracts, or that key employees crucial to the success of the business have left.
a) Compliance First and foremost do ensure that the proposed business is totally in compliance of all the legal laws wherever their business operations are and there shall be an update of all the compliances as well as remarks as being called for non-compliances. The reasons of knowing this compliance in totality is that it is normally difficult for the proposed buyers to rectify past wrongdoings of the previous owners as the process would be time-consuming and they would not have a clear understanding of what had happened before they took over the business. Compliance includes knowing all the Legal status of the business, their litigation, notices, update stand and other. This is the most crucial factors post financial due diligence as this gives the idea to move further or not if the financial due diligence is found in good shape.
b) Financial Due Diligence Performing Financial Due Diligence will allow the buyer to better understand the financial position of the business, enabling him to assess the right price to pay for it.
c) Assets The inventory of a business changes over time. Therefore, it is important for a buyer to check the physical assets of the business to ensure that they are in good condition and are still in the company’s possession.
d) Intellectual Property The buyer should obtain a schedule of all intellectual property rights, both registered and unregistered, belonging to the business.
e) Key Employees Key placement holders are integral to the success of a company. The buyer should ensure that the key employees remain with the company using contractual means. Additionally, it is essential to ensure that the employment contracts and employment handbooks comply with employment law. This prevents non-compliant documents that can result in fines.
f) Licenses and Permits The buyer should ensure that the business has all necessary licenses and permits required for operation.
g) Contracts The buyer should review all of the business’ contracts to ascertain its rights and obligations. He should also check if there are any change-of-control clauses in the contracts that will result in a breach of contract when the owner of the business changes. The buyer should also assess the risks the company is exposed to.
While drafting the agreement for the purchase of the business, you can insert warranties and other terms that will protect you from losses suffered upon taking over the business.
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