Buyer Beware – what to look out for when buying a business
When buying an already established business, you would assume you have done enough research of the figures and financials to know how much profit to expect from that business. This however, is not always the case. Many people buy businesses, only to realise further down the track that they are not making as much profit as their predecessors. This can be for a few reasons which we will discuss below.
In some cases, there are no sinister implications at all; it is simply because the buyer is not suitable to run that type of business. Of course the buyer will not want to admit that they are doing a lesser job than their predecessor, and this is where their questions about misrepresentation will arise.
If you are considering buying a business, you really should have a look at all financials before making a decision. All information provided by the vendor in the due diligence process is a great place to start when determining whether misrepresentation has occurred.
Sometimes the figures provided during the due diligence process do not form a true representation of the financial situation of the business being purchased. A pitfall can occur when the business has a number of outlets but is only selling one of these outlets. They may present the sales from all outlets, but only include the expenses of the outlet they are selling. This increases the value and sale price of the business and exaggerates the profits that the buyer can expect.
You may also want to look through any computer hard drives and books left behind by the previous owner; this could lead you to information on their financials that you would not otherwise know. Information like this could greatly help when deciding whether or not the purchaser has a case.
If the purchaser does have a case, you first need to work out their claim. This can be done by working out the difference in the actual value and price paid, once you have obtained the correct financial figures. This forms the basis of the claim, along with other financial loses such as actual trading loses and costs of additional finance.
When purchasing a business, it is critical to employ the help of people with relevant qualifications to undertake due diligence. It will cost a little extra to start with, but is well worth it in the long run and can save you from a much bigger hassle in the future.
If you need advice regarding a similar issue, the experiences lawyers here at The Quinn Group are able to assist. For this or any other issues, please submit an online enquiry or call 1300 QUINNS (784 667).