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If you’re in the process of Buying A Business, or still considering buying a business, there are a number of questions you’ll need to ask the seller. It’s not a small decision to make, so it’s important that you gather as much information as possible to make the right choice going forward. After all, this is all part of your legal due diligence.
Perhaps you chose to purchase a business because it’s easier to hit the ground running – after all, most things are already set up for you. However, it’s not that simple. Consider the following:
- What happens to the existing employees?
- What if their suppliers don’t want to work with me?
- Is this the right market for me to go into?
- What if the business isn’t doing so well? What does this mean when I become the new owner?
While buying a business is an exciting step to take, it’s important not to ignore the red flags that could come up early in the purchasing process. Don’t worry – we’ve compiled a list of 15 questions you might want to ask the seller before you finalise anything.
This way, you can ensure your investment is worth it!
1. Why Are You Selling The Business?
This might seem like an obvious question to ask, but don’t underestimate how much it can reveal. The seller could be selling for many reasons, and in some cases, it can imply that the business isn’t doing so well.
For example, if the seller is selling the business simply because they want to retire, this may not raise any red flags as a buyer. If there aren’t any other reasons causing the business to be unappealing or unprofitable, you’re likely in a good position to start a successful business journey.
Say a business is being sold at a lower price because it wasn’t doing well. You think you could buy and change up a few things to make it better.
However, you may still want to reconsider as there may be other factors influencing business performance. Was business bad because of a marketing failure? Or is it a bad reputation they picked up? Or a less than ideal location? It can be quite difficult to improve business performance if it started on shaky grounds.
How Long Have You Had The Business For?
It also wouldn’t hurt to ask the seller how long they’ve owned the business. The main reason is that some businesses that have been running for a long time will likely have established a strong company culture. Longstanding reputation that could be difficult to change.
This would also include any internal procedures and policies that have become a part of their identity. If you start changing things up drastically the second you step in the seller’s shoes, this might not sit well with existing staff.
2. Is It A Share Sale Or An Asset Sale?
There are two types of sales when selling a business, so before you make any final decisions, you should know which one is more suitable for you.
A share sale is where a company sells the ownership of the company to someone else. So, if you’re the buyer, you’ll be a shareholder and owner of all the assets (tangible and intangible). This means that any liabilities from the seller will be transferred to you.
An asset sale means the seller is selling either all or some of the business’ assets to you. So, you’re not necessarily gaining entire ownership – you would just have control over the assets you agree to purchase, and the seller is still the main owner. This means that no liabilities will be transferred to you upon the purchase of the business.
Each type of sale has its advantages and disadvantages, so you should ask the seller for more details before purchasing (for example, you may need to pay Stamp Duty). We’ve written more about the features of each sale here.
3. What Kind Of Skills Do You Need?
It’s always good to have a diverse skill set no matter what industry you’re going into, but sometimes, you need specific skills or expertise to thrive. Buying an existing business is beneficial because you have someone who’s already gone through the process of running it, so you know exactly what you’ll need before you start. And if you don’t have that particular skill, you have time to perfect it before you purchase the business.
You’d also want to ask the seller what kinds of obstacles they came across while running the business, so you can prepare for when they come your way. You could ask something like, “If you could go back, what would you have done differently?”
This is a great way to prepare for running the business as you’d know what kind of hiccups you might come across (and what kind of legal documents you may want to start preparing, too!).
4. How Has The Business Been Valued?
There are many factors that come into play when deciding how much to sell a business for, but it’s worth clarifying this with the seller. In other words, how did the seller come down to that purchase price?
Perhaps the business has outstanding debts that affected the price, or maybe it doesn’t actually own some of its assets. These are all things that can increase or decrease the purchase price, so it’s something you should cover.
This could save you some serious headaches later down the track.
5. How Did You Organise Your Finances? Can I Access Them?
This is arguably the most important question to ask the seller before you purchase a business. The seller might tell you the business was doing well, but you won’t know this for sure until you see numbers to back it all up. In other words, accessing their financial records will confirm whether they are making good money, and this will give you an idea of whether you want to be inheriting that financial stability or instability.
Firstly, you’ll want to request access to the relevant records, such as:
- Tax return
- Business activity statements
- Cash flow statements
You also want to understand the numbers, such as profit and loss. This will tell you how much of the business’ revenue fluctuates, and you can craft your business plan accordingly.
To be sure, you might want to go through a trial period. During this time, you’ll be able to see if their minimum sales are actually consistent with what the seller has reported.
6. What Kinds Of Policies Or Procedures Are In Place?
When buying any business, it’s important to know how everything works internally. After all, as the new owner, you’ll be running all of it.
Generally speaking, businesses should have the right policies in place. For example, it’s good practice to have a Data Breach Response Plan (especially for e-commerce businesses) or a Work From Home Policy. While a lack of these policies may not mean much to you, it does shed some light on how the business manages their obligations and the company culture generally.
It could also be a red flag that they’re not compliant with certain laws. For example, businesses with an annual turnover of more than $3 million need to comply with the Privacy Act (1988). If you purchase that business, you might face some legal trouble for non-compliance on the seller’s part, or you’d need to be doing a lot of work to fix it all up. This is something you want to consider before buying.
7. Have You Ever Run Into Legal Trouble Before?
It might be a bit awkward to ask, but it’s important that the seller discloses any legal action they may be facing as this could seriously affect the business under your ownership. Any debts or liabilities will transfer to you after you purchase the business, so you want to have an honest conversation with the seller about this.
The amount of debts or liabilities the business has can affect the purchase price, so you should always look into this.
8. What Marketing Strategies Worked For You?
It can be a whole process to know exactly how to cater to your target audience, so it’s a good thing that you can ask the seller about the strategies they used or their marketing plan. This way, you’ll know which strategies will work for you based on real data and results.
It’ll also help you mitigate risks and reduce the need to do market research.
Before you purchase any business, you should also know what types of people or customers you want to cater to. This will help you craft some good strategies for your short and long-term goals.
For example, if they cater to a niche market, this might be something to get you thinking twice about your investment. It could potentially be more difficult to make money if your target audience is small and you’re not sure how to meet their needs.
9. What Happens To The Business’ Assets?
When we talk about assets, we’re referring to both tangible and intangible assets.
Tangible assets would refer to physical things like cars, furniture or the products you’re selling. When you become the new owner, this would all be transferred to you (assuming this is in the Agreement).
However, you should also think about your intangible assets, like Intellectual Property and Licences. When you purchase a business, you need to sort out transferring ownership of certain rights.
| Example Avery owns a popular Italian restaurant that has operated as a family business for over a decade, but has decided she now wants to retire. She sells the restaurant to Jamee, and is currently in the process of transferring ownership to her. The restaurant requires a liquor licence since they sell all sorts of alcohol as part of their menu. To do this, she needs to apply to transfer their existing liquor licence to Jamee as the new owner. The type of licence remains the same, but Jamee will be the new owner. |
Some businesses (especially e-commerce businesses) will need to transfer ownership of IP to the buyer. Otherwise, they will not have proper access to that information and it could severely affect the way they can run the business.
For example, a business owner will have lots of trouble running marketing activities if they don’t legally own the business logo. This comes under the concept of Registering A Trademark, and is something you should definitely discuss with the seller so you can ensure ownership is transferred properly, and in compliance with the relevant laws.
You may also want to think carefully about transferring the lease the seller had signed. You should familiarise yourself with the terms of the lease and whether you’re capable of meeting the same legal obligations as the previous owner.
If not, you may want to negotiate these terms upon transfer.
Do I Need A Non-Compete Clause?
Sometimes, the seller will sell the business just to set up another one in the same industry. So, they basically become your competitor.
This isn’t an ideal situation, since they know everything about your business and would have many ways to gain a competitive advantage over you. So, you may want to propose a Non-Compete Clause with the seller to avoid this.
A Non-Compete Clause prevents someone from competing with the business after they’ve left. This way, you can protect your trade secrets from being used against you in a competitive environment.
10. Who Are Your Competitors?
Before you make any purchase, you want to know the kind of environment you’re stepping into. Ask the seller about the level of competition in the market, and this should help you determine what resources you’ll need to gain a competitive advantage.
For example, if the seller discloses that it is an extremely competitive environment, you’d want to allocate more money and resources to marketing to ensure you retain your competitive edge. If not, perhaps that money could be better spent elsewhere (for example, more stock).
11. Who Do You Work With?
Before ownership is handed over to you, you should know which suppliers the business has arrangements with. This way, you’re aware of any legal obligations you have to third parties and how you can maintain them.
This is particularly important where the business has been operating for quite some time, and the owner has established some strong relationships with their suppliers. If this is the case, your first action as the new owner probably shouldn’t be to cut these ties or damage that relationship. In the same way you’d want to maintain a good reputation with your clients, you want to maintain good commercial relationships with suppliers as it’s critical to your business success.
No matter what type of business you’re buying, you have a duty to ensure all the paperwork is updated following the transfer of ownership. This includes your agreements with suppliers (known as a Supply Agreement).
If there are some issues in the supply chain or just some things you want to tweak, be sure to update your agreement accordingly.
12. What Happens To The Employees?
When a seller finds a buyer for their business, they’ll need to officially terminate their contracts with employees. Put simply, employees need to be let go.
However, the seller usually makes a new offer to them.
From here, there are two options:
- Employee rejects the offer and accepts compensation (for example, they could receive a redundancy payment or an Employment Termination Payment), or
- Employee accepts the offer and is now formally employed by the new buyer (this requires a new Employment Contract).
If the employee accepts the offer to work for the new buyer, the seller needs to ensure they transfer the employees’ updated records. Other things can also be transferred (e.g. their rights under their Award), but this depends on whether the buyer chooses to recognise their service with the old employer – we’ve written more about this here.
Put simply, as the buyer, you need to decide whether you want to formally employ existing staff. If so, you have a number of obligations (for example, the seller may still need to pay them their entitlements since it’s still a termination of employment).
From a not-so-legal perspective, you should also ensure that you’re familiar with their company culture so you don’t ‘shock’ the system on your first day. If you drastically change the way everything runs as soon as you buy the business, this may not sit well with some employees.
13. What Is Your Exit Strategy?
A business owner may want to leave the business or sell it, while also limiting their losses. To do this, they use an Exit Strategy to reduce their stake in the business, but also make some money out of it. However, this takes years to plan out as you’d need to manage your finances in a way that maintains good profitability when it comes down to selling the business.
You may want to ask the seller if they had an exit strategy while they were running the business. This shows that they actually went through the process of ensuring the business was in good shape for whoever buys it.
If they did not have an exit strategy, this could cause some issues when you’re in the seller’s shoes. For example, you could have a number of debts to pay or unstable finances that could cost you your long-term investment.
If they do have an exit strategy, you can remain confident that the business is in good shape for you to run it even after they’re out of the picture.
14. How Many Hours Do You Dedicate To The Business Per Week?
Before you jump into a new business, you want to get an idea of how much time you’ll be spending or dedicating to it.
Running any business will require lots of time and effort, but you need to know whether you’d be willing to allocate the right amount of hours. Ask your seller how many hours they dedicated, and this should help you determine whether you’d be in good shape to do the same.
It will also help you plan ahead, such as purchasing extra resources or hiring more staff if the effort is not realistic for you.
15. Would You Stay A While Before Handing It Over Completely?
Learning to manage a completely new business can be overwhelming and may take some time. There’s nothing wrong with asking the seller if they’re willing to stay for a bit to teach you how to use the ropes.
Also remember that the seller is likely to have established some important relationships with customers, partners and suppliers alike. If they simply walk away, these relationships could be left damaged, ultimately affecting your business with you as the new owner (this is because the owner carries goodwill with them).
So, you may want to consider a handover period. This allows you to be introduced to important clients/partners. You can think of it as a smooth way to ease into your new role.
Next Steps
Buying a business is an exciting stage, but it comes with a lot of considerations. You should always seek help from an experienced lawyer to review or draft your Sales Agreement before making any final decisions.
By asking the seller the right questions, you can be notified of any red flags or potential issues that could arise later down the track. This is all part of your responsibility when it comes to any big purchase – you can read more about what else you can do as a potential buyer here.
You can reach out to us at team@sprintlaw.com.au or contact us on 1800 730 617 for an obligation-free chat.
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