The Key Factors to Consider When Making an Offer to Purchase a Business
17 November 2024

The Key Factors to Consider When Making an Offer to Purchase a Business

Purchasing a business is a significant decision that requires careful consideration and thorough evaluation. Whether you're a seasoned entrepreneur or a first-time buyer, understanding the key factors involved in the process can help you make an informed decision. Here are some of the things to consider when making an offer to purchase a business:


1. What are you purchasing: Assets v share purchase

One of the first decisions you'll need to make is whether to purchase the assets of the business or the shares of the company. An asset purchase involves buying specific assets such as equipment, inventory, and intellectual property, while a share purchase involves buying the shares of the company, effectively taking over the entire business. Each option has its advantages and disadvantages, so it's important to consult with legal and financial advisors to determine the best approach for your situation.


2. Who will be the purchaser: The entity that the business is to operate under

Deciding on the entity that will operate the business is crucial for tax and legal purposes. The entity could be a sole proprietorship, partnership, limited liability company (LLC), or corporation. Each entity type has different implications for GST (Goods and Services Tax) and other tax obligations. It's essential to choose the right entity structure to optimise tax benefits and ensure compliance with regulations.


3. Conduct due diligence on the business

Due diligence is a critical step in the business acquisition process. It involves thoroughly investigating the business to assess its financial health, legal standing, and overall viability. Evaluate the goodwill portion of the purchase, which represents the business's reputation and customer relationships. Additionally, check what plant, fittings, and fixtures are included in the purchase and ensure they are not the property of the landlord or leased under a hire purchase by the vendor.


4. How will you finance the purchase?

Determining how you will finance the purchase is a key consideration. Options include personal savings, bank loans, investor funding, or seller financing. Each financing method has its pros and cons, so it's important to evaluate which option aligns with your financial situation and business goals. Ensure you have a clear plan for securing the necessary funds and managing any associated risks.


5. Assess the employees and key staff

Understanding the existing workforce is crucial when purchasing a business. Identify any key staff members who are essential to the business's operations and consider whether they need to be retained. Assess the overall employee structure, including their roles, salaries, and benefits. Retaining key employees can help ensure a smooth transition and maintain business continuity.


6. Determine vendor warranties

Vendor warranties are assurances provided by the seller regarding the condition and performance of the business. These warranties can cover various aspects, such as financial statements, legal compliance, and the condition of assets. Determine what vendor warranties are required to protect your interests and ensure that the seller is held accountable for any discrepancies or issues that arise post-purchase.


7. Review lease agreements

If the business operates from leased premises, it's important to review the lease agreements. Check the terms and conditions of the lease, including the duration, rent, and any renewal options. If the land is leased, you will need to obtain consent from the landlord to assign the lease to you. Ensure that the lease terms are favourable and align with your business plans.


8. Warranty as to turnover

Having a clear understanding of the business's turnover and financial performance is essential before making an offer. Request detailed financial statements, including profit and loss statements, balance sheets, and cash flow statements. This information will help you assess the business's profitability and make an informed decision about the purchase price.


9. Vendor assist period

A vendor assist period is a specified duration during which the seller agrees to assist you post-settlement. This assistance can include training, introducing you to key clients, and providing operational support. Determine the length and scope of the vendor assist period to ensure a smooth transition and minimise disruptions to the business.


10. Restraint of trade

A restraint of trade clause is designed to prevent the seller from operating a similar business within a certain period and geographic area post-settlement. This clause helps protect your investment by reducing the risk of competition from the seller. Ensure that the restraint of trade terms are clearly defined and enforceable.


By considering these key factors, you can make a well-informed offer to purchase a business and increase your chances of success. Remember to seek professional advice from legal, financial, and business experts to guide you through the process and address any specific concerns.


Article written by Emma Roberts and Georgia Mossman.


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