Every day, in the media or on social networks, you may come across advertisements for the “sale of an operating business”. For many people, the opportunity appears particularly promising – the acquisition of an already functioning business, with established clients and suppliers. Sounds tempting, doesn’t it? You buy something that already works, skip the difficult start and begin earning literally from the very next day.

At the same time, however, the acquisition of an established business reveals a number of risks of which buyers are not warned or do not have the knowledge to notice, as a result of which serious risks may arise for them, not only of an unsuccessful investment, but also of being burdened with substantial liabilities.

This article is dedicated precisely to avoiding or minimizing such risks.

What are you actually buying?

What the mechanism of the transaction actually is, is question number one - and, surprisingly often, remains without a clear answer.

Often buyers imagine the following picture: you sign the agreement, pay the amount, and the next morning everything continues as before - the employees come to work, the suppliers deliver the goods, and the same clients walk through the door.

It is entirely possible however , that none of this will happen if you are not clear about what exactly you are buying. And there are several options, each with its own specific features:

Buyingthe equipment

This is the fastest and easiest way - but also the most misleading. Because a number of important things remain outside the transaction:

The premises do not come with the machines.If the premises are leased, the lease agreement is not automatically transferred to the new owner. Without an additional arrangement with the landlord, it may turn out that you have to move the equipment out as early as the next day.
The employees have an agreement with the seller company, not with the buyerThe transfer of the equipment does not automatically make them your employees.
The licences, registrations and permits are also not transferred. . In order for the business to continue functioning, these registrations, licences and permits must be issued in the name of the buyer.

Acquisition very thankful of the commercial enterprise

In this option, the scope of what is acquired is much broader – the buyer receives the entire set of rights, obligations and factual relationships that make up the enterprise. The procedure is more complex than the purchase of equipment, but its effect is also greater.

There is, however, one important specific feature: the acquiring company is obliged to manage the transferred enterprise separately for a period of 6 months from the registration of the transfer in the Commercial Register. Within that period, any creditor, both of the transferring company and of the acquiring company, whose claim is unsecured and arose before the date of registration of the transfer, may request performance or security.

Acquisition of a business through the transfer of the company shares of the company carrying it out.

In this way, control over the company is acquired and the new owner may take any decisions regarding its management, as well as regarding the disposal of its assets and the overall operation of the business. . The company is acquired with all its rights and obligations, but separate management of the assets is not provided for, as in the case of the sale of a commercial enterprise, insofar as the company remains a separate legal entity with its own rights and obligations, separate from those of its owner.

Conducting a detailed legal analysis (due diligence) of the company being acquired.

After you have clarified what exactly you are buying buying and what the transaction will beit is time for the most important check – - an in-depth review of the business.

What should the review cover??

Ownership rights:: Sounds elementary, but it is not. It is possible that the company is not the owner of the goods it sells, and that the equipment being acquired has been taken on lease and has not yet been paid for.

Intellectual property:: We recommend that this check is not omitted, due to the potential risks it may entail for the activity. It is possible that the business has its own logo which is not protected as a trademark or may even infringe a trademark registered by another person, which, in addition to requiring costs in connection with rebranding, may also lead to claims for damages.

Contracts::

Lease agreements – what their term is, whether they have been registered (so that they can be opposed to a new owner of the premises),under what conditions they may be terminated early, what obligations are assumed under them, etc.
Employment agreements - what the rights and obligations of the employees are and what activities may be assigned to them according to the job descriptions.

Agreements with clients and suppliers - what rights the company has exactly and for what period you can rely on the business functioning as it has so far.

Liabilities: : A very important part of the entire analysis is also to check the company’s liabilities to suppliers, public liabilities, received credits and other loans, in order to minimize the risk that, against the price paid, the buyer receives a business burdened with liabilities to such an extent that it cannot continue to function.

The archive and company books: : In this way, it will be possible to check whether the activity has been carried out lawfully - from a tax, accounting and employment perspective. This is where things such as unpaid salaries, liabilities to counterparties, missing mandatory internal policies or improperly kept accounting records come to light – grounds that may give rise to future sanctions or lawsuits against the company.

Drafting a clear and detailed agreement for the acquisition of the business

Regardless of which of the methods under item I will be used to acquire the business and how complete the review carried out under item II has been, some risks cannot be excluded. But they can be minimized - here, the greatest importance lies in how the agreement for the sale of the business is drafted.

What should it contain??

A clear definition of what you are buying;
Terms and deadlines for payment of the price;
If necessary - an obligation of the seller to assist you with the management after the transaction or in negotiations with suppliers and landlords (especially when you are buying only separate rights).

And one more very important thing - warranties from the seller.It is reasonable to secure written warranties regarding the ownership of the business, the absence of liabilities and compliance with the legislation to date. These warranties should be linked to liability for damagesif they prove to be untrue – specific amounts should be provided as contractual penalties. If there are debts whose existence is known, there is no obstacle to agreeing on an obligation of the seller to cover all costs in connection with that liability.

Actions after the acquisition of the business.

After the conclusion of the agreement, the necessary administrative changes should also be carried out so that the activity can continue and sanctions are not imposed by the state authorities.

In the case of acquisition of a commercial enterprise or company shares, the agreements must be registered in the Commercial Register. In the case of a purchase of shares, this usually goes together with:

change of the manager, so that the new owner can manage personally or through a person chosen by them;
change of the registered office, so that the company’s correspondence is received at the new office.

When acquiring shares, for certain activities it may be necessary to announce the change before the competent authorities. Failure to do so may lead to sanctions or even to suspension of the activity.

If only equipment is acquired, you must conclude a new lease agreement, new agreements with suppliers and clients, and obtain the necessary permits in your own name.

Conclusion

It is evident from the above that the acquisition of a business may involve a number of specific features and risks that may turn a seemingly good transaction into a bad investment. For this reason, we recommend that at each of the stages listed above you consult a specialist in such transactions.

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The team of KGK Law Firm has experience and in-depth knowledge of business acquisition transactions. Our lawyers can advise you on the optimal structuring of such a transaction, carry out a full analysis of the rights and obligations of the seller and of the objects of the transaction, draft the sale agreement, as well as assist with all registrations and notifications due thereafter. If you need assistance, you can contact us.