Investigating and Buying a Business Flashcards
What is due diligence in the context of buying a business?
The process of investigating and assessing a business before purchase to evaluate its value and risks.
Name three financial records to review during due diligence.
Income statements, tax returns, and profit and loss records.
What is the purpose of valuing a business before purchase?
To ensure the asking price is fair and aligns with the business’s actual worth.
Name two warning signs when buying a business.
The seller avoids disclosing information or is involved in legal proceedings.
What is the goal of negotiating a business purchase?
To reach an agreement on price, terms, and conditions that benefit both parties.
List two negotiation tips for buying a business.
Stick to your budget and take your time during negotiations.
What is the role of a purchase contract in a business sale?
It provides legal clarity on terms, price, and responsibilities of both buyer and seller.
Name the two types of purchase contracts.
Contracts for assets and contracts for shares.
What is the risk of buying shares in a business?
Inheriting liabilities like legal claims or tax disputes associated with the company.
What are the advantages of buying a business instead of starting one?
Established customer base, immediate cash flow, and existing infrastructure.
List two disadvantages of buying an existing business.
High upfront costs and potential need for significant improvements.
What should you consider when deciding on a business legal structure?
Financial risk, personal exposure, and expansion plans.
Name four common business legal structures.
Sole trader, partnership, company, and trust.
What is the significance of “restraint of trade” in a purchase contract?
It prevents the seller from opening a competing business nearby.
What is positional bargaining?
Negotiation where both buyer and seller aim to maximize their own benefits.
What does a due diligence process typically involve?
Reviewing financial, legal, operational, and market aspects of the business.
Why is scouting the location part of early business research?
To understand competition, customer demographics, and market potential.
What should be included in the financial segment of due diligence?
Bank loans, utility accounts, and cash flow records.
Why is professional advice crucial when buying a business?
To navigate legal, financial, and operational complexities.
What is a fair price allocation in a purchase contract?
Assigning specific values to goodwill, equipment, and inventory to manage tax implications.
What is a contingency clause in a purchase contract?
A clause that protects the buyer, such as making the sale conditional on finance approval. +
How can potential buyers protect themselves from seller misrepresentation?
By including warranty and indemnity clauses in the contract.
Why is confidentiality important during business negotiations?
To protect sensitive information and maintain leverage during negotiations.
What is the role of a solicitor in drafting a purchase contract?
To ensure legal compliance and protect the buyer from risks.
How can demographics affect a business location?
They influence the availability of customers and workforce suitability.
What are the risks of choosing the wrong business structure?
Higher taxes, legal complexities, and additional costs for restructuring.
Why might a business owner sell at a “fire sale” price?
Due to financial distress or urgent personal circumstances.
What is a break-up price in a purchase contract?
A detailed allocation of the total price to various business assets.
How do lenders assess loan applications for business purchases?
By evaluating the borrower’s ability to repay, security offered, and business viability.
Why is it essential to check supplier contracts during due diligence?
To ensure continuity of operations and avoid supply chain disruptions.
