Understanding contracts when buying or selling a business

Throughout your research and negotiations, keep sight of your aims and the risk assessment you made for buying this business at the price you have offered. You might lose money on advisers' fees, but it is better to cancel the sale than take on liabilities you cannot afford. Have at least one other target business lined up in case this deal falls through.

Gain a thorough understanding of the business you are buying

Do your own valuation of the company, its market position, future profits, how it will fit with your existing business, if you have one, and weigh the total cost against total benefit before you make an initial offer. Find out why the seller wants to sell and if the business has any major problems. Decide whether you want to buy the assets only, and therefore have no legal obligations for previous contracts, or the entire business. If attempting to buy assets only, be aware that a seller may expect a higher price to compensate for any loss of tax benefits available from the sale of shares.

You need to find the balance between protecting yourself against future liability and maintaining trust with the seller, especially if you want the seller to continue in an advisory role during any handover period. Your inquiries need to be thorough but also discreet enough not to disrupt the business.

What to look out for when buying a business

Before you decide to buy, be sure that

• the seller has given you all the information you need
• the seller's claims are confirmed by the business' records and by your discussions with clients, suppliers, etc
• you know the exact ownership of the business and its assets
• the warranties and disclosure letter cover all unexpected contractual obligations
• you know the cost of your liabilities to the business' employees, especially concerning pensions and redundancy pay
• all problems have been resolved and agreed in writing with the seller