Running your own bakery is an exciting endeavour, though starting from scratch can be challenging. This makes the option of buying an existing bakery a great alternative. However, buying a bakery will involve some paperwork to complete the sale. To help, this article will explore the due diligence process and key documents you will need when buying a bakery.
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| Notably, there is a difference between a business sale and a share sale. Remember to consider both options when buying a business. The type of sale you undertake will determine what documents you need. |
Due Diligence Process When Buying a Bakery
Due diligence is a process where a buyer reviews and confirms that all information about the bakery (which the seller generally provides) is accurate. This information should reflect your business plans and finances. For example, do you wish to have a fully furnished premise or do you have capital available to renovate?
Accordingly, the due diligence process when buying a bakery can include an:
- inspection of the premises;
- investigation of the condition of all equipment;
- examination of all business records and contracts; and
- evaluation into the business’ ability to make a profit.
Ultimately, due diligence allows you to pick up on any red flags before entering into a formal sale of business agreement. There is no one size fits all approach. Indeed, the industry your business is in will determine what specific elements you must review. For example, when looking at buying a bakery, your due diligence process may be more focused on double-checking the premises is suitable for opening a bakery and that existing equipment (like industrial ovens and fridges) are in working order.
Key Contracts to Review
There are a number of key documents that are common to most businesses.
Leases
A lease is a contract between a tenant and a landlord that allows you to occupy a premises for a fixed period. During due diligence, ensure that the seller speaks to the landlord in relation to ending their obligations under the lease whether it be novating the lease to you (transfer of both rights and obligations to a you as the new tenant) or terminating it altogether. In which case, you will sign a fresh contract.
Other elements to review when buying a bakery include:
- Rent – is this amount sustainable for you? Are there any expected rent increases you should note?
- Term of the Lease – How long is left on the term? Is there an option to renew the lease for another term?
- Permitted Use – Does the lease allow you to use the premise in a way that you intend for your bakery to operate?
- Tenant Obligations – What is the tenant responsible for under the lease agreement?
Supply Contracts
When undertaking a business sale, there is a distinction between entering into a fresh contract or having an existing one novated to you. As indicated above, a novation agreement is where the contract is terminated with the original party and a new contract is created with you, as the new party.
Through either method, it is imperative that you read through the supply contracts correctly. Otherwise, you risk not having any stock to successfully operate your new bakery.
Look out for key clauses, including:
- Assignment Clauses – Can the seller actually transfer the contract to you? Or, do you need to obtain the supplier’s consent?
- Payment Terms – What kind of payment arrangement does the seller have with the supplier?
- Services – What kind of service will the supplier provide to you? Are these suitable or compatible with your business plan?
Client Agreements
A client agreement is a legal contract between your business and its clients. It sets out the rights and obligations of both parties and a dispute process if an issue arises. When buying an existing bakery, be sure to check if the seller can transfer these contracts to you without the other party’s consent, or if the contract can be novated. Here, you can substitute one party for another without changing the obligations agreed to in the original contract. This can be ideal if you are happy with the obligations in the original contract and they are suitable for your bakery. However, if there are significant changes you would like to make, entering into a fresh contract is more suitable.
Indeed, obtaining access to a business’ client list is very valuable. So, before you agree to buy the bakery, double check that you will also have access to pre-existing client agreements. Likewise, you may wish to impose your own terms and conditions. Accordingly, you need to make this clear to your clients and seek their consent.
Employment Contracts
When buying a bakery, you should speak to the seller about their staff. Importantly, there is no obligation for you to employ existing staff. Carefully consider whether they are right for your business and whether there is an appropriate number of staff members.
If you do decide to take on existing employees, you will need to make an offer of employment. Generally, this offer should have substantially similar terms to the existing employment agreement with the seller. Likewise, there may also be outstanding employee entitlements that the seller must make, so keep an eye out for those.
Sale of Business Agreement
A sale of business agreement is a critical document that outlines what each party will transfer to each other. As a buyer, you want to ensure key assets of the business will correctly transfer to you, like equipment and inventory.
Additionally, your sale agreement when buying a bakery should include the following key terms:
- the vendor and purchaser’s details;
- the purchase price and payment terms;
- a list of assets being transferred;
- a timeline of the sale;
- applicable pre-sale conditions;
- applicable restraints of trade;
- any warranties and indemnities;
- completion terms.
Key Takeaways
Buying a bakery will involve a number of key documents. During the due diligence process, you want to ensure you thoroughly review the lease to your new premise, supply contracts, client agreements and employment contracts. You may also want to inspect other contracts that are relevant to the bakery you intend to buy. Once you are confident in proceeding with the sale, you can enter into a sale of business agreement with the vendor.
Written by Laini Bennett from Legal Vision