Buying a Manufacturing Business? 4 Key Points to Consider
There are many factors to consider when purchasing a manufacturing business in order to protect the continuity of the business following settlement. Here I cover some of the important issues (amongst others) that a buyer should discuss with their business lawyer before signing a contract.
Local & State Government Approvals
It is important to ascertain what licences and approvals are required from the local government in order to conduct the business from its premises. A buyer will also need to ascertain whether the business currently has these licences and approvals, whether they are transferable and whether the buyer will be able to continue to meet any conditions contained in the licences and approvals.
Manufacturing businesses are generally required to meet many legal obligations under state and local laws in relation to fire safety, workplace health and safety, and environmental laws such as noise reduction and trade wastes. Many manufacturing businesses will require multiple licences and certificates from their local government prior to being able to operate the business. It is therefore imperative that the contract is made conditional upon the approval or transfer of all necessary licences by way of a carefully worded special condition being inserted into the contract.
Lease, Plant & Equipment
If the premises are leased, whether there is to be an assignment of an existing lease or the negotiation of a new lease, it is important to ensure that the premises are fit for the purpose of the business, particularly in regard to structure and floor load bearings. Also, due to many manufacturing businesses having large fixed plant and equipment, attention should be paid to the length of the lease and whether any options for renewal are satisfactory.
It is also vital to ascertain the working order, age and repair requirements of all plant and equipment. If the machinery itself is imported, are there locally trained technicians that can repair the machinery and are spare parts available locally? Are all warranties for the machinery capable of being transferred?
As the premises, plant and equipment are vital to the business, it is imperative that a special condition is inserted in the contract to ensure that the buyer has the time to have the machinery and premises inspected by qualified professionals. Without such a special condition the contract will not be subject to the buyer being satisfied that the premises is fit for the intended purpose; and that all the plant and equipment is in good working order, is suitable for the intended purpose and that any warranties can be transferred to the buyer. Also, a special condition should be inserted to ensure that the contract is subject to the buyer’s satisfaction with the proposed lease.
Intellectual Property
A vital element to the continuity of the business is its intellectual property, both registered and un-registered. It is important to ensure that all of the business’ intellectual property, including such things as patterns, designs, recipes, patents, trademarks and manuals, are included in the contract for purchase of the business. If the seller is not including particular items of intellectual property in the sale then these should be specifically listed in an annexure to the contract.
Distribution & Supply Agreements
Another important issue is the business’ relationship with its suppliers and distributors. It must be ascertained whether agreements between the seller and its suppliers and distributors are in writing, whether they are adequate and whether they are able to be transferred to the buyer. Attention should be paid to whether any agreements are exclusive and therefore tie the buyer into being only able to deal with one supplier or distributor, thereby limiting the current and future potential of the business.
It is therefore imperative that the contract is made conditional, by way of a special condition, upon the buyer’s satisfaction and transfer or negotiation of new agreements for all suppliers and distributors.
Conclusion
Without the assistance of a specialist business lawyer, prior to signing a contract, to ensure that all assets of the business are included and that all the above issues can be addressed, a buyer may find that their business runs into legal and financial trouble soon after settlement.
Buying a business? See Buying a Business in Queensland.
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Joe Kafrouni, Accredited Specialist in Business Law, Kafrouni Law
Disclaimer: This article is general information only and is not legal advice. Before acting on it, get advice on your own circumstances. To the extent the law allows, Kafrouni Law accepts no liability for any loss arising from reliance on it. This article is the copyright of Kafrouni Law.
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