Table of Contents
In Short
- Ensure the purchase aligns with your financial capacity to avoid future cash flow issues.
- Verify the business’s financial health by reviewing revenue, profits, and cash flow to confirm the seller’s claims.
- Be prepared to implement any required modifications post-purchase to maintain or enhance business performance.
Tips for Businesses
Before purchasing an online business, thoroughly assess its financial statements to verify profitability. Ensure the acquisition fits within your budget to prevent financial strain. Additionally, plan for any operational changes needed post-purchase to sustain or improve the business’s success.
Buying an existing online business, even a small business, can be a good investment where the eCommerce business is successful. Online retailers can attract a higher ROI and be a better investment than other investment opportunities. For example, you may get a better return from purchasing an existing eCommerce business as opposed to investing in index funds. Also, buying an online business rather than starting your own can save time. However, purchasing an existing online business will only be a good investment if it has sufficient sales. Additionally, you should not have to deal with any legal issues immediately after acquiring the eCommerce business. As such, you must be aware of the legal issues that can arise before you purchase an existing eCommerce business. This article will explain some legal issues to consider before you purchase an existing online business.
1. Staying Within Your Budget
When you purchase an existing online business, you must stay within your budget. Otherwise, you risk not being able to meet other financial commitments, such as utility bill’s for your business’ operation or employee wages. If you fail to pay these bills on time, your credit records may show you defaulted on the debt.
On a similar note, you may decide to fund the purchase of the existing online business via financing. If so, you must ensure you can make the repayments at the agreed schedule. When you take out a loan to purchase the existing e-commerce website, you commit to a legal contract.
2. Due Diligence
When buying an online business, you should know the legal issues arising from poor due diligence. Due diligence means ensuring that the e-commerce website you are buying is what the seller claims it is. Due diligence can include checking the online business’ financial statements. You should check these statements to ensure the financial information you have on the business is accurate. Unfortunately, some online companies and online business owners inflate their figures. As a result, you have an inaccurate picture of the online business’ profits and the financial well-being of the online store.
Carrying out financial due diligence will allow you to make realistic plans for the online business. In particular, you should check the online business’:
- revenue;
- profits; and
- cash-flow figures.
Before you commit to buying the business, you should also confirm the seller’s plans after the sale. The seller may plan to remain in the same area of eCommerce and open a new business. As such, this move could create competition with your acquired business. You may subsequently encounter legal issues down the line. It would be wise of you to include a non-compete clause in the eCommerce business sale agreement. However, you may find enforcing the non-compete clause very difficult in certain overseas markets.
It would be wise of you to include a non-compete clause in the eCommerce business sale agreement. However, you may find enforcing the non-compete clause very difficult in certain overseas markets.
Certain online business sellers will purposely sell to you so they may receive an injection of funds. Your seller may then use these funds to build their community business.
As part of conducting due diligence, you also need to understand how the business works before you purchase it. If you fail to understand how the business works, you may face legal issues later on.
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3. Necessary Changes
Legal issues can arise if you buy an existing online business whose operating model is ineffective. You need to be aware of any core business operational issues before your purchase. If you find the online business is facing significant challenges, you can make certain changes. These changes will allow you to avoid further legal issues down the track. For example, you may make the following changes:
- where legal contracts with unproductive contractors can end rather than renew, you can terminate them; and
- stop selling products that do not make a significant profit.
This guide will walk you through the due diligence process when purchasing a UK business.
Key Takeaways
If you are planning on buying an existing eCommerce business, you need to know that you may inherit legal issues. However, naturally, you will want to avoid these legal issues when you purchase an existing online business.
If you need help understanding the legal issues to be aware of when purchasing an existing online business, our experienced eCommerce lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Due diligence involves verifying that the online business matches the seller’s claims. This includes reviewing financial statements for accurate revenue, profit, and cash flow figures. It also means understanding the business operations and addressing potential competition by negotiating a non-compete clause in the sale agreement.
Staying within your budget ensures you can meet financial obligations like operational costs and employee wages. If you use financing, you must adhere to the loan repayment schedule, as this is a legal obligation.
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