Checklist to avoid costly mistakes

Chartered accountant Adam Smith uses a checklist to assist his clients when buying a business:

Buy the assets and not the business. This strategy is suitable for tax reasons as assets will be recognised by the amount you paid rather than what the seller paid for them. Further, if the company owes money to creditors or has a pending future legal claim, you won’t assume any of the liabilities.

Understand how accounts receivable are dealt with on closing date. To allow for any pending bad debts, the buyer should consider acquiring the accounts receivable at a discount or removing certain poor-paying customers from the deal itself.

Determine whether there are any outstanding penalties or payouts when you take over the leases.

In some cases, buyers of companies have paid out an existing lease and negotiated new terms with the lessor after the sale took place at much higher rates. This predicament can impact profits and cash flow due to unforeseen additional costs.

Unpaid payroll and sales tax. Despite what the financial accounts suggest, always verify whether payroll, sales and other business tax liabilities are up to date with the relevant state authorities.

Obtain an indemnity from the seller. No matter how thorough your due diligence, not every skeleton may be unearthed from the closet. To avoid being sued for previous wrongdoings, obtain an indemnity from the seller to defend any legal issues and pay out any claims (within a finite period) after the sale takes place.