Buying a business – what you need to know



 

Embarking on a new business venture, and purchasing a business, can be an incredibly exciting time. Who doesn’t want to be their own boss, and run their own race? However, along with all the excitement, comes the responsibility of making sound business decisions. The first decisions you will make, start from the moment you consider buying a business, and these are some of the most critical decisions you will make in your life. There is so much that can go wrong. 

With so much at stake, having trusted and experienced legal guidance and support, during this time is essential, and we understand that the whole process can be quite overwhelming, However, we have listed below, all the things you need to know when buying a business, the pros, the cons and even the dreaded tax issues that you need to consider before embarking on the journey of purchasing an existing business. 
 

The pros and cons of buying an existing business

There are certainly some huge advantages to purchasing a business, rather than starting a business from scratch. Established businesses have the benefit of already having an identity, good business history, and if they have been managed and operated efficiently and effectively, that have industry and market knowledge and presence, they may come with experienced and well-trained staff, and have a loyal customer or client base. Established businesses, who have trading history, also have greater access to financial backing from larger institutions, such as banks. 

However, whilst all that sounds amazing, there are some disadvantages of purchasing an existing business. This can include outstanding contractual obligations that you will need to address, and if the business has not been operated and managed efficiently, the business may have a poor reputation that you will inherit, which will take time and effort on your part to rebuild. 
 

Figure out what you are actually buying

One of the biggest things to establish when considering purchasing an existing business, is what is it that you are actually buying? Some of the important questions that you need to be asking are; 
 

  • Are you buying the registered business name, and other identifiable features such as, the businesses contact phone number, social media accounts, and branding details such as business logo etc.
  • Are you buying the stock? And if so, how will this be valued? Will the value be agreed upon by you and the current owner, or will the assistance of a valuer be required? Are you buying the plant and equipment? Is any of the equipment leased, or registered with the Personal Properties Security Register (PPSA Register)? 
  • Are you buying the business premises, or is the premises leased? If the premises are leased, has landlord consent been obtained? 

Some of the other considerations are whether you will be acquiring, or effectively purchasing debt, such as a large creditor list and plant and equipment under contract. You will also need to consider the implications of taking on existing employees, who have potential leave entitlements owed to them such as Long Service Leave. 

Whilst, these may seem completely overwhelming, having a trusted legal and financial advisor assist in this part of the process, will ensure you get the answers to all of the relevant questions, and the agreement based on the information received, can be placed into a Deed of Proposed Agreement, which can assist the parties to clarify each aspect of the sale before entering into a formal Contract of Sale. 
 

Conduct your due diligence

Undertaking adequate due diligence is absolutely critical in any business purchase, and you should seek the assistance of professionals (lawyers and accountants) to assist you in this part of the purchase. 

Prior to making an offer, you will need to review the business’ documents, to ascertain if the business meets your requirements. Reviewing these documents will help you identify and manage any potential risks that are associated with the purchase. 

Some of the documents that will need to be thoroughly reviewed include; 
 

  • Financial records such as annual reports, profit and loss statements, balance sheets, cash-flow statements, sales records, and Business Activity Statements (BAS).
  • Licences and permits, ensuring that the correct licences and accreditations are held and are up to date. You will also need to ensure that these can be transferred to you, and in the event that cannot, you will need to make arrangements to apply for any required licence and permits.
  • Contracts and leases, including commercial lease of premises as discussed above, and any contracts which require assigning to you.
  • Outstanding Agreements that may be in place between the current owner and third parties.
  • List of Assets, ensuring that the assets listed are what exists within the business, including the details of the business’s intellectual property.
  • List of Liabilities which outline any business debts, and the status of the debts. It is also important to view any refunds and warranties will exist. 
 

Tax & Stamp Duty

Government taxes and stamp duty implications are also something else you will need to consider and factor into your business purchase. You will need to pay stamp duty on the transaction, the rate of which will be dependent upon the purchase price, and you may also be subjected to Capital Gains Tax and GST. You will need to seek professional financial advice to ensure you fully understand your obligations in this area.
 

Make an offer

After completing a through review of all relevant documents, and if the business is suitable to your needs and requirements. You will need to make a formal offer. Generally, formal offers are made in writing and the terms of your offer, should be clearly outlined. Your offer should include the details such as; 
 

  • Proposed purchase price and deposit 
  • Settlement terms
  • Proposed Special Conditions and Additional Terms specific to the purchase, such as any handover 

Once your offer has been accepted, working with your legal advisor, you will be able to enter a Deed of Agreement, so that the offer and details are formalised, and a contract can be prepared. 
 

Formalise the agreement – Contracts 

Having an agreement in writing, and formalised by entering into a Contract of Sale, will ensure that the agreement between both parties is clear. The contract, as well as outlining the specifics of the sale, such as price, deposit, and settlement details, will also provide specific details regarding the expectations of each party, and in the event of an issue, how the issue can be resolved. 
 

Final word

The is certainly a lot to consider when purchasing an existing business, and it can be tempting to put the “legal stuff” to the side and come back to it later. However, without seeking assistance, as you work your way through the purchase process, particularly in the due diligence and negotiation stages, you may be setting yourself up to fail before you have even commenced. 

Making informed decisions, based upon having all the relevant information about the business in front of you is essential to success. Having adequate legal support, from trusted professionals can ensure you make the best, informed decision possible.  

 
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