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3 ways to protect yourself when buying a business

On Behalf of | Oct 26, 2021 | Business-Employment

There are many benefits to buying an existing business rather than starting a new one. You don’t have to develop processes or curate a brand. You won’t have to find clients and customers or source the right kind of machinery.

In theory, buying a business is a turnkey transaction that allows you to assume control of operations relatively quickly. However, there are absolutely risks that come from purchasing an existing business. You will need to think carefully about how to protect yourself when purchasing an existing company.

Make sure that the price you pay is appropriate

The value of business equipment depreciates over time, and companies often have liabilities in addition to assets that you will have to assume. You will need to carefully look at a company’s finances and their inventory of assets, as well as the condition of the facilities, to set a fair price.

It’s important to ensure that the price you offer for the company has a basis in both its current financial circumstances and its capacity to generate profit in the future.

Think about your long-term liability risks

When you purchase a business, you assume responsibility for it and all of its contracts. You have an obligation to the employees, as well as to the existing clients or customers. In some cases, you could find yourself facing legal claims in the future related to the behavior of the previous owner.

You may want to include terms in your contract that limit what liability you assume when purchasing the company. For example, you might want to add a clause that makes it clear that the previous owners remain personally responsible for any claims brought against the business for actions taken before your acquisition of it.

Carefully consider how the transition will go

Many companies that change ownership will see a major shift in staff following the transaction. Workers may view the company as unstable and seek jobs elsewhere. They may follow former owners or managers who leave the company. You need to be ready to hire and train replacement staff if any existing employees leave the company.

Speaking of training, you also need to think about what transitional support the current management team or owner can provide. Having them stay on for three to six months to help you learn how to manage the company could help smooth the transitional process.

Thinking proactively about the risks involved in buying a business can help you limit the danger of such a major financial transaction.