Many Business Owners chose to buy an established Business, rather than setting up their own Business from scratch.
Buying an existing Business can have great advantages, most important of which, is that the Purchaser gains a fully functioning business with an existing client base on the date of settlement.
However, you should ensure that your Contract/Heads of Agreement guarantees a “Trial Period with Minimum Takings” to make sure the performance of the Business lives up to the Vendor’s statements.
What is a Trial Period?
A trial period is a period (usually 7 – 14 days) within which you can attend the Business and observe day to day operations. Further, if it is a “Trial Period with Minimum Takings”, the Vendor must ensure that the turnover during the Trial Period meets the “Minimum Takings” guaranteed in the Contract.
Advantages of a Trial Period
It allows the Purchaser to:
- gain practical experience in running the Business
- meet employees, landlords, suppliers, clients, and other people relevant to the Business
- gain insight in to the costs and turnover of the Business
- inspect the condition of the Chattels and Premises of the Business
- withdraw from the Contract or re-negotiate the Purchase Price if the turnover does not meet the “Minimum Takings” guaranteed in the Contract
Risks of the Trial Period
Despite the above advantages, when trialing a business, the Purchaser needs to be careful of the following:
- The Purchaser must be satisfied with the due diligence checks of the Business and have satisfactory finance to complete the Purchase.
- Some Vendors maybe dishonest and enter false transactions to inflate sales.
- Vendors may undertake marketing to maximize Business during the Trial Period or request the assistance of family and friends to make purchases during the Trial Period.
- Seasonal fluctuations may cause the turnover during the Trial Period to be more or less than the average.
Due to the above, you should not buy a Business based on the performance during a Trial Period alone. Before signing a Contract or Heads of Agreement you should always obtain independent financial advise and independent legal advise to ensure that the Business is thoroughly investigated.
Despite the above risks, we strongly recommend that a purchase of Business be always subject to a “Trial Period with Minimum Takings” as it gives the Purchaser a great insight into the Business and day to day management of the Business.
Discuss your Business Purchase with our Solicitor before signing the contract to minimize stress and future disputes.