11/02/2011 by info.

It has always been assumed that a contract for the sale of a business was a contract between two businesses therefore assumed that the equal relationship between the two parties meant that consumer law did not apply.

However recent small claims court cases have shown that unless the buying of businesses forms part of the sellers businesses then the person selling the business must be acting as a consumer in appointing the agent.

This has widespread consequences with regard to the contract for the sale of a business.

The Cancellation of Contracts Made in a Consumer’s Home or Place of Work etc Regulations 2008 apply to a contract made with a consumer at their home, workplace arranged by the vendor away from his business premises.

It sets the cooling off period at 7 calendar days both for contracts made as a result of visits by traders and make clear that the cooling off period starts on the day of receipt of a notice of the right to cancel from a trader.

So, where a business transfer agent sets up an appointment for their sales representative at the business owners premises or in a hotel, this constitutes a time when the agent is supposed to inform the agent that they are entitled to a 7 day colling off period after they sign the contract to sell their business.

This means, if the agent did not give you notice in writing of your right 7 days cancellation rights, under these regulations they legally cannot enforce the contract.

How many other businesses are also falling foul of these regulations we wonder?

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09/02/2011 by info.

Your attention, ladies and gentlemen – a little scenario!

Imagine you’re a book collector browsing in a Rare and Second-hand Bookshop. You spot what you want, a first edition of A.A. Milne’s The House at Pooh Corner, published 1928, drawings and designs by E.H. Shepard, acceptable condition, only £200.

But the purchase goes badly. The shopkeeper is unhappy about parting with the book, which apparently has sentimental value, a gift from the author to a relative. You’re harassed with questions: why do you want it? Will you look after it? Do you understand its value?

Exasperated by this irrelevant pestering, you resort to sarcasm. Actually, you tell the shopkeeper, you don’t give a damn about the book. It’s all about your neighbours, whom you hate, and who are Winnie the Pooh fanatics. What you’re really intending to do is kidnap them at gunpoint, shred the book before their eyes, and laugh while they weep. You offer £180: unsurprisingly, you’re turned down. You leave, knowing where to find a slightly damaged copy for £160.

Does this behaviour seem odd? It’s actually very common in business transfers, with owners feeling they have an emotional stake in the business they’re selling and becoming precious about what buyers will do after the transaction is complete. Selling a business, however, is a commercial process allowing no place for emotion.

Soon, your business will not be yours. Live with it!

Focus instead on the purpose of your exit. Whether you’re retiring, re-investing or buying a new business, the new owner’s plans are totally secondary to your need to obtain the market value of your property.

Likewise, buyers should think along similar lines. By all means negotiate with sellers, but don’t aim to make the pips squeak! You could find it advantageous later to have paid a slightly higher price, when you’re looking to the previous owner for goodwill and support. It is not better to find the business you would rather own than the business you would rather pay for.

Both parties to a business sale should think long-term rather than short-term. There’s no emotion in buying a Mars bar: think of transferring a business in the same way.

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04/02/2011 by info.

A break clause in a lease gives a business owner the automatic right to terminate the lease at one or more specified dates. An entreprenuer may want a break clause if they are unsure about how successful a business venture is going to be.

So they will negotiate a five year lease for example with a two year break clause, and if the venture is not working out they can then withdraw without any fear that the landlord will want the other three years rent.

The problem with these break clauses of course is that the owner only has a short period of time to decide whether a venture is working or not, and some break clauses require a long period of notice say six months.

The business may not even open for business for the first one or two months of the lease as they will be fitting the premises and stocking it, meaning that the business owner has effectively just over a year to decide whether to opt for the break.

Now most new businesses do not make a decent profit in the first year, most small businesses are sold for one to two times ongoing profitability, why, because that is the opportunity cost or starting a business. You either have the choice of buy a business with immediate profitability or start one and have minimal profitability for the first two years.

A lot of business owners also overestimate their profits in year one, and just because they are not meeting their unrealistic targets they often give up.

So what happens psychologically with a break clause?

The owner knows he has a fall back position and he has to make a decision after a year, is this business going to work? I have already shown that a year may not be enough time to assess whether a business is going to work, an owner therefore may give up just as he business is about to bear fruit.

In addition it stops the owner selling the business as, in year one no one would be interested, and he knows that the business is going to close in 6 months so there is no point in trying to sell it is there?

The problem with break clauses is that they are often used as a substitute for research and business planning. Ensuring that your business proposal has legs and ensuring it will be successful is replaced by a negotiating break clause.

Are lease break clauses leading to the closure of otherwise good businesses? The answer clearly is yes.

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