Buying and Selling a business


The decision to buy or sell a business is one of the more important decisions you'll make in your life, so it is sensible to try and minimise the risk inherent to the transaction as much as possible and to try and avoid letting the excitement and offer deadlines cloud your judgment. You do this by collecting as much information as you can, stepping back from the scene and getting an objective opinion. And if you can't actually minimise the risk, you have to at least know what the risk is that you are exposing yourself to.

While both the buyer and the seller will obviously act in their own best interests, this doesn't necessarily mean that they will try to swindle each other. After all, in theory both would want the transaction to be concluded successfully. However, in business as in life, sometimes things go wrong and it is at that point that the agreement becomes the piece of paper that everything hangs on, and that the parties then try to interpret in the view that best suit their point of view.

Right at the beginning of the business relationship while the parties still believe and like each other, they don't want to spend too much time on a contract, but contracts are done for the times when things go wrong. Therefore it is worthwhile to get a little bit of legal advice right at the beginning to make sure that the parties' true intentions are captured in the contract to such an extent that it cannot be twisted or interpreted in any other way at a later stage. Doing this would change the old adage to "penny wise, pound wise".

It's like insurance: you have it, you pay for it, but you still hope you never have to use it. And then, when you do need it, you want to be sure that your policy gives you the cover and protection you want and desperately need. Things to consider by the Buyer and Seller could include the following among others:

Buyer

• Making sure that they are getting fair value for the purchase price – basically value for money. To do this you need to make sure that the different elements of the business are in fact as the Seller says it is.
• Determine exactly what the Seller means when he/she say that a certain turnover is made as this will often mean that the Seller asks for a higher purchase price. Is there for instance any danger of clients cancelling their orders at a later date leaving the Buyer with having paid an inflated purchase price.
• Something that specifically needs to be checked is the status is of any sales recorded that have not yet been paid for. The Seller may increase the asking price of the business based on these advance sales, but if payment hasn't happened yet, the Buyer might never see the income.
• Buyers should check the tax status, debtors and creditors books, assets and liabilities, condition of machinery, status of software, liquor or other licences, if the business is being sued or is suing someone at present, or if there is a threat of the business being sued. These things can be covered as part of the due diligence exercise.

Seller

• Making sure you don't prejudice the business by giving away sensitive information and then have the sale fall through. This can be avoided by asking the Buyer to sign a confidentiality agreement to protect business sensitive information in case the sale does not go through.
• Making sure that the Seller actually makes payment by getting a form of payment guarantee and deposit.
• Limit any potential claims by the Buyer after handing over the business to the Buyer by setting up appropriate indemnities, being clear about warranties given and properly understanding the transfer of ownership processes.

As a final comment one obviously has to consider the best business form to use for the particular enterprise that you wish to engage with, whether it be a sole proprietorship, a partnership, a business trust, or a form of company in terms of the new Companies Act of 2008.

In any of the above matters, one would be well advised to take advice from a lawyer on the specific issues as they are applicable to your circumstances.

From the team
MA Cooper Attorneys
With Energy and Experience, giving you Expression