The benefits of buying an existing business as opposed to building a new one from scratch are many but the process is often fraught with possible pitfalls. Here are ten things to be aware of when buying a business.

Buy the assets, not the legal entity.

Buying of a legal entity can lead to problems if the entity owes money to people and is later sued. So when buying a business it is better to form a new entity and then buy the assets of the existing company into this new structure. This not only protects you from being sued for matters that have taken place in the exiting companies past, it also gives you some tax benefit as the value of assets purchased with form part of your current tax basis and not the price originally paid by the seller years ago.

Make sure all taxes are paid

Always check that the seller has paid all taxes, even when you are only buying the assets. In some cases SARS can still come looking to you for payment of outstanding taxes on sales or PAYE or UIF. So make sure the business is current with tax payments, and then get the revenue service to issue a “clearance letter” saying that the current seller is up to date with tax payments. This may take awhile but will save you time and money in the future.

Make sure you buy the accounts receivable

At closing of a business there is likely to be a number of customers still owing money. Make sure you are the one who will be responsible for collecting these debts by purchasing the accounts receivable for a discount on the basis that some of the debtors will not eventually make payment. This will put you in a stronger negotiating position if in the future any of these clients come forward requesting new orders.

Have rights of leases seeded to you

When the business is leasing premises, find out if the landlord will allow the current business to seed tenants rights over to the new business. When doing your enquiries make sure to establish the current lease duration and the term remaining. If the landlord is willing to have tenants rights seeded on the same terms and price, then you may want to consider remaining in the current premises. But only if the remaining lease is greater than two years. If not, then it will probably be better for you to spend some money now and start finding new premises with a new lease of 5 or 10 years. Also find out whether the landlord is holding a security deposit and if so has the seller included this deposit in the purchase price. If yes, then make sure that the deposit is written into the purchase agreement.

Clear closing adjustments ahead of closing

Many services are paid for in year in advance by businesses. Sellers may come back to you at closing and request refund for the portion of the year remaining, during which the new business will be benefitting. Prepaid expenses like a security deposit or advertising are not normally included in the purchase cost but are tagged on at the closing of the current business. Ask the seller to give you a list of any “closing adjustments” so that you may negotiate them and budget ahead.

Negotiate a Letter of Intent

A Letter of Intent is a short agreement between the seller and you. It defines the important terms and conditions of the sale, such as the purchase price, how and when money will be paid, exactly what is being bought and what is not, any non-compete terms for the seller and so forth. The Letter of Intent is not a binding legal contract, but it is worthwhile taking the effort to do one as it will help lawyers in drafting the definitive legal contracts that will form the binding contract of sale.

Advertise in the Classifieds

Make sure that the sale is advertised in the business classifieds. Failing to do this leaves the door open for a creditor to rescind the transaction in order to prevent the sellers assets from being sold out from under them. Even if the seller has no creditors, do it for good measure. Once advertised and no objections are received, then there is very little anyone can do to stop or reverse the sale.

Get an Indemnity from the Seller

No matter how hard you and your accounts and lawyers work to check the sellers records, there is always the chance that something will be overlooked. Then you find yourself being sued because of something the seller did years ago. So get the seller to sign an indemnity. This ensures that they will defend any unexpected lawsuit and pay for any costs and judgments. The seller can also ask you to give an indemnity, just in case he gets sued for something you do after the closing takes place.

Get the Seller to Stick Around

Many businesses are built around the charm and personal relations of the owner. So get the seller to make an appearance at the business for a few weeks after the closing. Consider paying them for their time in order to make sure they do have an incentive for doing so. During this time, they can introduce you to customers and generally get you into the feeling of operating the business.

Get to Know the Employees

Before you buy make sure you take time out to get to know the key employees. Make sure they are willing to remain. Often they are the ones who see customers on a day-to-day basis or operate special machinery. Their skills are important to a smooth transition. There is a danger that key employees will leave the employ of the company when they hear the business is up for sale. Enter a provision to the contract such that the seller and yourself will announce the proposed sale of the business to all employees within 48-hours before closing and that you will be given reasonable opportunity to meet with each employee in order to determine each persons willingness to continue in the employ of the business. You may also add a provision that you can walk from the deal if you are not satisfied that key employees will remain in service at least for enough time for them to teach somebody else what they know.