The Need to Knows of Buying a Business
Understanding Ownership:
Typically, the established nature and continuous cash flow of a business are the primary reason people choose to purchase a business over creating one. However, purchasing an existing business also comes with its own set of challenges. To guarantee a seamless transfer, we will provide you a summary of everything you need to know before buying a business.
If you’re considering buying your first business, you might want to consider if ownership is the appropriate move for you. You must examine your individual financial situation as well as your time management and self-control.
Business Research:
Make sure that the business is problem-free by doing all required checks before making any offers. Usually, vendors aim to make a favorable impression of the business in order to sell the business, therefore thorough examination is required prior to the purchase.
Due Diligence Check:
Once you have found a business you are interested in, it is important to ensure the financial and legal health of a business. This includes:
- Financial Statements;
- Tax records;
- Stock levels;
- Customer and suppliers;
- Reason behind sale;
- Legal rights and obligations; and
- Competitors.
Financial Statements:
Review the balance sheets, profit and loss statements, annual reports, and any other cash-flow statements for at least the past three years. Ensure that these statements are audited and if not, you will need to verify the numbers with the use of independent evidence such as bank statements and loan documents.
When working with financial statements, it is advised that you engage with an accountant or broker who can accurately check the statements and offer you any guidance regarding the financial aspect of the business.
Tax Records:
- check income tax for the past three years;
- check payroll tax records if applicable;
- PAYG, GST and other tax obligations should be up to date.
- check stamp duty records if applicable; and
- Will the business be GST free?
- How much stamp duty do you have to pay?
- Check the business activity statements to reconcile the taxable income and profits with the business’ financial statements.
It is recommended to work in conjunction with an accountant in relation to the tax records to ensure nothing is missed.
Stock Levels:
Stock control is a vital aspect of a business as it provides insight into a company’s inventory. When looking at stock levels you must look at:
- The minimum stock levels that the business should keep in supply;
- Maximum stock levels that the business can stock; and
- Reorder point which indicates the need to reorder.
Customers and Suppliers;
Speak to existing customers and establish their needs and perceptions such as:
- Strengths and weaknesses of the business’s products or services;
- Do the customers use competitors? If so, what advantages do the competitors bring?
- To what extent will they continue their support to the business after a changeover?
Speak to suppliers and establish the business’s credit history such as:
- Does the business pay on time?
- How does it compare with competitors?
Reason Behind Sale;
Always ask the vendor what their reason for sale is to understand their current motives. Asking the vendor the following are ideal:
- How long has the business operated for?
- How long has it been on the market?
- How many offers have been made?
Speaking with clients, vendors, and rival companies is also another promising idea to learn more about the business and any issues that may exist.
Legal Rights and Obligations:
Be sure to check:
- The business holds all relevant permits and licenses needed to operate;
- Any worker entitlements that need to be made;
- All workers’ compensation premiums are up to date;
- The lease;
- Any binding agreements binding the business;
- Check the Australian Securities and Investments Commission (ASIC) website for company details;
- Check the consumer affairs agency for any record of unscrupulous trading; and
- Ensure the vendor puts all the agreements into writing ensuring you have a copy of such.
Competitors:
Examine the following:
- Any prospective competitors and their strengths and weaknesses;
- Any potential threats, which can be found out through the local council, which may inform you of any competitors planning to open; and
- Look at the state of the economy and its impact on your business.
Reviewing Legal Matters:
You will need to review all legal matters such as;
- Intellectual property;
- Trademarks;
- Registered patents;
- Existing contracts and contractual obligations with staff and third parties such as customers and suppliers; and
- Any past, current or unsettled lawsuits.
Valuing the Business:
When purchasing a business, you want to look at the price the vendor is selling the business, the future earnings, the business net worth, and the market price for similar businesses. You want to ensure you have an estimate of the value of the business prior to making an initial offer. We recommend you look at getting professional help when it comes to appraising a business for your offer to reciprocate its worth.
Offers:
Following your assessment of the business, you will need to submit an offer to the vendor. For you to reach an agreement you may need to haggle over the purchase price. Know the maximum amount you are willing to spend for the business before you start negotiating, and never rush the process. You might reach an agreement if the price is reasonable for you, but you can back out of the discussion if the terms are unsatisfactory.
Contract of Sale
To make this purchase official, a contract of sale needs to be drawn and signed by both parties. This guarantees the establishment of a legally enforceable contract concerning the business transaction and provides legislative compensation if the contract is breached.
We highly recommend that legal representation is consulted during this process, as the contract is legally binding and could result in legal action if you or the other party do not abide by the terms.
Contact us today at Elamine Lawyers where we strive for the finest results for you and your business. Contact us at 03 8400 0100 or email us at admin@elaminelaw.com.au to book you in for an initial consultation.
