Getting Cheated when Buying a Business

Buyers walk into traps frequently when buying a business. In this post, we identify the biggest, most heartbreaking mistakes Buyers make when buying a business.

1. Don’t secure Clients/Suppliers – the Sale Contract should be conditional upon the Seller transferring existing Contracts/Agreements with key Clients/Suppliers if not all of them. If the Contracts/Agreements are not worth the paper they’re written on, then look at writing into the Contract of Sale a “performance based” buy-out with a lump sum payment at Settlement and the balance paid upon satisfying the performance criteria.
2. Don’t secure the Seller – the Sale Contract should be conditional upon the Seller, and specifically the Director/s of Company/s agreeing to complete satisfactory handover training. In particular, if the business’ success is largely dependent of the Seller, then look at withholding a “retention” amount from the Settlement amount to secure the Seller’s handover training/performance over a certain period.
3. Don’t secure a Non-Compete Agreement – the Sale Contract should have a strong non-compete clause to prevent the Seller and specifically the Director/s, Shareholders, and Unit Holders etc. of the Selling Company from establishing competition within a certain period and radius from the Business. This should also include soliciting staff, clients and suppliers of the business. Penalties should apply where a breach occurs. Without a written agreement in place, you won’t have any recourse.
4. Don’t secure Confidentiality – the Sale Contract should have a Confidentiality or Non-disclosure agreement which protects the confidential information of the Business. Once the Seller moves on, you do not want them to use the confidential information or reveal the top secrets of your success to others!
5. Don’t Review BAS Statements or Accountant Financials – Do not buy a business until you see at least one of these reports! Figures punched into a spreadsheet or notebook can be falsified. Tax Invoices can be falsified. Even figures produced from Accounting programs such as MYOB, Quickbooks, and Xero can be falsified. You need to review the financials which are declared to the Tax Office!

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DISCLAIMER
The information contained in this post is an opinion based on past experience. Do not take this as financial or legal advice.