Buying a Business

Tricks and Traps

Buying a business can be a great investment but it needs to be done with great care. Unlike property, business assets are often intangible. With the price of a business usually calculated by a multiple of it’s earnings, it’s not uncommon for goodwill to represent 80% of the purchase price of a business. How do you make sure you end up receiving what you’re paying for?

The first thing to ensure is that there is no Company Charge or Bill of Sale over the business. Even though the goodwill may be intangible it doesn’t mean that a bank or financier hasn’t taken a security over it.

Secondly, you need to ensure that you have an effective restraint of trade against the vendor. There is no point paying big money to buy his client list, if he can open business down the road in competition with you shortly after settlement. Disputes over restraints of trade often appear in the courts and it is by no means certain that the courts will enforce a restraint. Indeed their starting point is that a restraint of trade is most likley invalid as being against public policy. The courts will not enforce them unless it is reasonable in all of the circumstances. Through years of experience and reading many cases on the issue we’ve worked out restraints that work and seen far too many restraints that don’t work.

It’s also important to find out from the vendor if any key employees should be restrained, or whether any key employee has recently left. This can often cause loss of former customers. All of these things should be covered in the special conditions of the contract and in vendors warranties.

If the vendor is willing to accept your money for the sale of his business, he should be willing to provide extensive warranties to put your mind at rest.

The key to getting the right answers is asking the right questions. We’ve developed extensive vendors warranties which are included in our contracts. These warranties cover all of the issues relevant to the operation of the business, including;

  • The premises and lease compliance
  • Town Planning approvals
  • Confirmation of accounts
  • Details about employees

Please call Peter Lee or Jon Vuong on 3435 4200 or email peter@plee.com.au if you have any enquiries.

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