Negotiating the Purchase of a Business

Negotiating the Purchase 

In Queensland, there is a standard Contract for purchase of a business, which enables you to secure the business, at the agreed price (effectively an option), with a nominal refundable deposit subject to a number of criteria, which you can set according to your circumstances. These can include: 

• Due diligence, whereby the Vendor allows you and/or your accountant access to all the books and records of the business, to verify all the vendors claims about the profitability and future viability of the business.
• A trial period, whereby you can attend the premised for an agreed time to verify the takings of the business (applicable to cash businesses).
• Finance clause. The Purchase can be subject to your being able to obtain Bank Finance sufficient to purchase the business.
• Special conditions. These can include the granting or assignment of licenses, permits, contracts, agencies, patents, re-zonings, or any other thing or condition necessary for your successful continuation of the business.
• Lease conditions. The contract can be subject to premises leases being granted or assigned on conditions suitable to you.
• Tuition. Generally, the contract will specify a tuition period, being the time the vendor will remain after settlement date, to ensure a smooth handover. The contract can also specify an extended period during which the previous owner will remain available for further assistance.
• Staff retention. In many cases, the contract will be subject to nominated key staff remaining with the new owner for an agreed period.
• Non-competition. The contract will specify a period, usually three years, during which the vendor may not operate in any way in competition with the business being sold.

Each of these conditions would specify a time frame. At the expiration of this time frame, you then have the option to reject the business, in which case your deposit is refunded, or confirm the contract by payment of the balance of deposit (10%). Settlement would then usually take place within 30 days.

Remember to run the business

Once you own the business, it is important to remember that the figures presented to you by the previous owner, were a record of his achievements in the business. They have no magical life of their own, and will only continue if you continue to operate the business.

The business can be seen as a car. It will only move if you drive it, and it will only avoid the inevitable obstacles that will come your way if you operate the steering wheel and controls accordingly.

I remember an ex Bank Manager who purchased a Fruit Shop. After the first month, he complained that the previous owner had lied about the figures. Even though he had conducted due diligence and a trial to verify the figures, the previous owner "must have faked them", because the business was now doing nowhere near the figures quoted.

I approached the previous owner about this. He told me he had indeed lied about the figures - the real figures were actually 10% better than he had let on.

The problem, he explained to me, was "you must-a sell-a da fruit". Where the new owner was sitting in his office watching and fretting about the figures, the previous owner had been out the front of his shop urging customers to "buy-a the lovely tomatoes".

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