Buying a business is not covered by consumer rights legislation. Whilst most shops have policies allowing you to return unwanted items, the same cannot be said about the process of purchasing a business.
The legal principle governing the sale of a business is known by the Latin phrase, “Caveat Emptor”. This translates as, “Let The Buyer Beware”.
It means that it is the responsibility of the buyer to make sure that the business they are buying is what they expect it to be. Consequently, it is extremely important to conduct Due Diligence.
Due Diligence is a detailed appraisal of a business prior to purchase. It should be carried out thoroughly, leaving no stone unturned.
This process will not only give a potential buyer a clear idea of the business’s value but also reveal any negative aspects the seller has not highlighted.
Knowing what is wrong with what you are buying should not necessarily prevent you from buying it. It can be used as leverage when negotiating the asking price and it can also force sellers into providing guarantees.
Do not be afraid to ask for guarantees and warranties. Make sure you get legal advice before doing this. If they are not legally binding, they are worthless.
Buyers should always seek professional help from lawyers and accountants when conducting due diligence. Do not cut corners with this. Better to spend money up front than to suffer the consequences later.
Due diligence is often more straight forward when buying a going concern. This is largely because there is a current record of how the business is performing. The same cannot be said of businesses that are dormant or not trading. Knowing what you are paying for is particularly important when purchasing businesses of this kind.
Make sure you get independent advice, even if the cost of advice is more than the asking price of the opportunity itself. As previously stated don’t be afraid to ask for legally binding guarantees and/or references from other buyers. If you don’t understand how the business makes money, then walk away. Above all use your common sense, and remember, if the offering looks too good to true then it probably is.