Entering an existing business - the potential traps to look out for

Posted by Luke Mitchell on 12 April 2018
Entering an existing business - the potential traps to look out for

Our recent blog focused on the importance of business owners properly documenting their agreement as to how their business will operate. But what about where a person is entering an existing business with an existing agreement as to how that business is to operate?

There are a number of potential traps for someone entering an existing business. Leaving aside the financial risks involved in becoming an owner of an existing business, those potential traps include:

  • restrictions on the appointment of directors;

  • a requirement to invest further significant funds beyond the initial "purchase" price in the event that the business needs to raise further capital in the future;

  • a requirement to personally guarantee debts that may have been incurred prior to the individual in question becoming an owner of the business;

  • if the incoming owner is to also be an employee of the business, the process through which that employment could be terminated and the effect that the termination of employment would have on the price that that owner receives for their interest in the business;

  • restraints of trade provisions;

  • the manner in which major business decisions will be decided;

  • the process to be followed in the event that additional owners are to acquire an interest in the business;

  • the process to be followed in the event that an owner wishes to exit the business.

Over the years we have acted on many sale and purchase of business transactions and have prepared and reviewed numerous ownership agreements.  It is essential that, before making a final decision on the commencement of, or acquisition of an interest in, a business, you ensure that not only your legal interests protected, but that you receive specialist advice as to the many commercial and practical issues that may arise during the life of the business. We specialise in providing clarity and confidence to business operators in their legal relationships – contact us today to discuss the legal needs of your business.