Purchasing a business can take time, energy and a lot of research!
It may seem less risky and more viable to purchase an existing business than to build one from the start, but it is important to do your homework to ensure you purchase the right business for you, at the right price!
During my 40 years experience in this area, I have seen many people go through the motions of purchasing a business. From emotional purchases that succeed, to strategic purchase that don't. I would like to share with you my "checklist" when it comes to making that all important decision. The more information and insight gained prior to signing that contract can only arm you with more knowledge.
There are many issues that need to be considered when purchasing a business and these can be listed as follows:
- What is it that you are buying?
- Business valuation issues
- Financial review of the business
- Due diligence
- Legal issues
- Proposed business structure
- Business start up requirements
- Working capital requirements
WHAT IS IT THAT YOU ARE BUYING?
It is important that a purchaser is very clear about what they are purchasing. Before entering into a purchase contract, ask yourself -- are you purchasing;
a) The shares of a company that owns the business or,
b) The business itself (plant & equipment, stock, goodwill business income, trademarks) or,
c) Individual assets
Depending on the type of business, it may be prudent to prepare a business valuation report, this type of report may provide an opinion on the value of the business to be acquired.
FINANCIAL REVIEW OF THE BUSINESS
In order to undertake an appropriate financial review of the business, you may need to obtain the following documents:
a) The three most recent annual financial statements,
b) Up to date interim financial statements,
c) The three most recent income tax returns for the business entity,
d) Business activity statements for the last four quarters.
Due diligence is the process of making a detailed review of all aspects of the business that you are intending to purchase. The resulting Due Diligence report will help you decide whether you feel comfortable with the representations made to you by the vendor of the business.
Purchase Contract – Goods and Service Tax (GST)
Most business transactions require GST to be paid on the transaction amount. However when purchasing a business, in most cases a concession applies. No GST will be payable by the purchaser if the transaction is a ‘supply of a going concern’.
This requirement plus other standard GST clauses need to be included in your final purchase contract.
Joint Venture/Shareholders Agreement
This document is absolutely vital, particularly where there are more than one unrelated parties. It will govern the relationship that will exist between shareholders/partners of your purchasing entity and key management employees.
Typically the following issues need to be addressed:
d) Entry and Exit
e) Intellectual Property
Legal Due Diligence Issues
Below is a list of other issues that should be investigated by your lawyers:
a) Where applicable, a final stock take needs to be undertaken immediately prior to settlement to ensure the correct sum is included in your final purchase settlement statement.
b) All business agreements need to be reviewed by your lawyers to ensure they suit your circumstance and that they can be assigned without posing any future problems to you. These agreements include:
- Rent agreements
- Lease/hire purchase agreements
- Employment agreements
- Other business agreements
c) A full asset listing should be included in the purchase contract, and this needs to be independently verified prior to settlement.
d) The retiring director/business owner and key employees should be requested to enter into a non competition agreement.
e) All permits and licenses necessary to conduct the business need to be reviewed and transferred to your operating entity. This includes the business name.
PROPOSE BUSINESS STRUCTURE
You will need to undertake a needs review to determine which business structure is appropriate for you. The most common structures are:
- Sole Trader
BUSINESS START-UP REQUIREMENTS
When purchasing or establishing a new business there are essential business areas that need to be attended to prior to commencing. These include:
- Australian Business Number Registration (ABN) including GST and Pay As You GO (PAYG) withholding registration for employees
- Accounting system set up (Xero accounting system recommended)
- Agree on accounting and bookkeeping responsibilities
- Complete Fair Work Act checklist
- Establish business insurance cover
- Finalise banking requirements
WORKING CAPITAL REQUIREMENTS
In addition to raising funds for the purchase price of the business and other associated costs (stamp duty, legal fees etc.), you need to ensure that you have sufficient funds for the working capital of the business (three months expenses recommended).