If you wish to purchase a business, you will need to spend adequate time and effort on its research, valuation and affordability aspects. After all, you would want to make sure that the particular business is the right fit for you and you have paid the right valuation for it.
Types of Business Purchase
Purchasing a business can typically be done by an asset or a share purchase. An asset purchase necessitates buying a few or all of the business assets. While in a share purchase, you end up buying the seller’s share which includes the buyer’s liabilities and debts.
The Process of A Business Purchase
The purchase process of business is structured in the following manner for the majority of business purchases:
Preliminary Negotiations & Discussions
You as the buyer will do the necessary analysis of the business, understand the value and the assets, debts and liabilities of the business. You may review the business finances to understand the value to be paid for it. A share purchase generally requires a higher level of due diligence as it includes the acquisition of assets along with debts and liabilities. Shareholder approval, government documentation requirement is reviewed and prepared in the process. You will also need to check if any third-party approval is awaited before the buyer can purchase them.
Understand the condition and the potential of a business before you decide to buy it. This will include analyzing the location of the business, the equipment possessed by them, the online reputation of the business and its goodwill.
Determine the asset value including building, shares and equipment. A detailed review of the company’s financial statements, bank statements and annual reports are essential.
Grants and financing will need to be ascertained for your business. Do take the time and confirm that the return on investment is good and the property is worth buying.
If a business is purchased with its inventory and all assets, a new Business Number may be needed. Review the type and nature of the business and the applicability of GST/HST on the business to understand its implications.
You can also enter into a letter of intent with parts of it being enforceable if you are serious about going ahead with the purchase. This letter will need to include binding promises from the seller not to negotiate with any other purchaser for a specified time period and a binding promise from the purchaser with non-disclosure clause about the seller’s trade and internal details.
Formal Agreement & Pre-Closing
Negotiations end when a formal and written agreement is made between the parties to the contract. This agreement includes all the intricate details like the terms, agreed price, time for turning over of the assets and many more items. The agreement draft is finalized and signed. The pre-closing includes making sure that the documentation is complete and a deal can be finalized at the closing time.
The deal is completed with the closing process which includes all the documentation. You will need to ensure that all documents are signed and notarized as needed, sales proceeds are appropriately disbursed, and documents are correctly recorded as per the agreement terms and conditions.
Factors to be Considered for Purchasing a Business
Type of Business
A franchise is a type of business where the franchisor allows the franchisee, the right to use a business name, trademark or the operating methodology associated with operating a specific business. You may have seen the majority of the franchise business models in the restaurant and retail industries, though they are found in almost all the sectors of the economy.
The franchisee makes agreed payments of the franchise fees including one-time franchise fees and additional royalty payments on a monthly or annual basis.
Franchise models have established businesses which need lesser capital than starting an independent business. They come with lower initial risk and higher resale values. Franchise businesses typically have an existing customer base as brand and product awareness is already present.
Business in a Leased Premises
Entering into a lease is a business contract which is legally binding. It is important to review certain areas of the lease agreement before you sign the purchase agreement of the business which is operating in a leased premise.
The duration of a commercial lease is typically between 3-10 years and is on a renewable basis based on the mutual agreement of the parties to the contract. Find out the possible end of the lease before you finalize the purchase agreement.
Landlords tend to protect themselves by including escalation clauses in the agreement. When you purchase the business on a leased premise, you will need to review the agreement with your Commercial Real Estate Lawyer. You will have to make sure that you are paying only for the CPI portion of the inflation apart from the agreed increases in taxes and direct operating costs
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