Buying an established business can be an enticing and lucrative opportunity. You get to hit the ground running, skipping the baby steps that launching your own venture generally brings. But, it’s also a very complex process – so there’s a lot that can go wrong.

You don’t want to pay over the odds for a lemon or find yourself facing liability issues and expensive lawsuits. If you don’t want the deal to turn sour, watch out for these five legal traps that can stand in your way.

 Not performing legal due diligence

It’s a given that you should scrutinise a business’ books line-by-line to see if any skeletons are hiding in the closet. But that’s not where your due diligence should stop. You need to uncover potential legal issues too. That means examining all the business’ contractual obligations, checking for pending lawsuits and confirming legal ownership of all key assets.

For example, if the business occupies leased premises you need to scrutinise the existing lease as you’ll be bound by its terms. Are these acceptable or too restrictive? Will the landlord transfer the lease into your name or do you need to renegotiate?

Not getting legal advice on the contract of sale

 Contracts aren’t light reading. But it’s critical you fully understand what you’re getting into before you sign. And, if you don’t get a lawyer to review the contract, you’re more likely to miss a key detail.

For example, the contract might not include a non-compete clause. This clause prevents the seller from poaching existing clients and employees after the sale or opening up a competing business within a certain geographical area or timeframe.

Not checking legal and regulatory compliance

The last thing you want to do is buy a business to then discover it’s falling foul of the law. To avoid that pitfall, you should check with government and regulatory bodies if there are any compliance issues and that all required licences and permits are in order.

Not knowing what you’re buying

When you buy a business, you can either purchase its shares or its assets. As a general rule, you’ll assume the seller’s liabilities, debts and obligations if you go for the stock. But in an asset purchase, you don’t. From a buyer’s perspective, an asset purchase is usually the more attractive option as it comes with less risk attached.

Not including an indemnity agreement

Even when you’ve gone through all the paperwork with a fine-tooth comb, you could still be sued for something the seller did or didn’t do when they owned the business.

The best way to avoid a potentially costly lawsuit in the future is to insist the seller sign an indemnity agreement before the deal gets inked.

Blaine Hattie is the principal solicitor at Sutton Laurence King Lawyers.

Buying a business can be a great investment. But there are plenty of legal traps waiting for unsuspecting buyers. Avoid these by getting the right legal advice from Sutton Laurence King. Call us on 03 9070 9810 or fill out this online form.