Taking over an existing business: what to check

Asset deal or share deal

Two structures, two risk regimes. An asset deal covers selected items: fittings, stock, customer base, contracts taken over by name. The buyer leaves the seller the liabilities they do not expressly assume, which makes it the prudent route.

Taking over the quotas or shares transfers the entire company, with all of its past — debts, disputes, tax and social security reassessments still possible. It is simpler contractually and far more demanding in terms of checks.

In an asset deal involving an assumption of debts notified to creditors, the joint liability of the buyer is a point to be dealt with expressly in the contract, not discovered afterwards.

What the seller's accounts do not show

Three checks are worth the trip. First: turnover reconstructed from actual takings and VAT statements, rather than from the profit and loss account alone. Second: the share of turnover tied to the seller as a person, which will leave with them. Third: the real condition of the fittings and technical equipment, whose replacement can account for a significant part of the price.

To which is added the question of the trend: three consecutive financial years say what a single one always hides.

The lease is the breaking point

A business without premises does not exist. Before any discussion of price, check that the lease can be assigned, and establish its remaining term, its renewal options, its current rent and its indexation mechanism — and whether the landlord intends to renegotiate on the occasion of the transfer.

A short lease, one that cannot be renewed, or one whose rent will be revised upwards when the operator changes, reduces the value of the business far more than the accounts suggest.

Staff transfer by operation of law

On the transfer of a business or part of a business, employment relationships pass to the buyer with all acquired rights, unless the employee objects. Seniority, salaries, untaken holidays and overtime follow.

That transfer must be analysed before signing: it determines a significant share of future costs and cannot be negotiated downwards by the sale contract alone.

Valuing the goodwill

Goodwill is generally valued from a multiple of restated operating profit — adjusted for the manager's remuneration, non-recurring charges and personal items — or, failing that, from a percentage of turnover specific to the sector. The two approaches cross-check each other; they do not replace each other.

The value of tangible assets adds to the reasoning but does not found it: recent fittings in a declining location are not worth their purchase price.

Check the location as though it were a new opening

The classic mistake in a takeover is to consider the location validated because the business exists. But the question is not whether the location worked; it is whether it will work: demographic change in the area, planning projects, the opening of a competing store, a change to the traffic scheme.

An address analysis run on the acquired premises takes a few minutes and compares directly with the seller's accounts. When the two diverge, one of them is wrong, and it is not always the analysis.