The Essential “must Know” Guide
This guide is those who are looking to purchase a small to medium size business in Australia. It contains information that may assist you in both understanding the process and avoiding some of the pitfalls. Hopefully, you will find it helpful.
Starting a brand new business
Setting up a brand new business can be done inexpensively but, of course, it will be without any systems goodwill and clients. The fact that you are reading this guide means that you’re looking to enter the business world where someone has before you proven that a concept actually works and you’re prepared to pay something for someone else’s work, hopefully so that you can start producing valuable income from day one.
Purchasing an Existing Business
An established business,, will presumably have goodwill in the marketplace and perhaps a recognisable name. It is likely that the business will have at least some systems, if not sophisticated systems. You will presumably have access to a customer base. When you buy an established business that is not a franchise, you will have the freedom to change the business and expand the business as you like.
Being your own business, you can scale it up into your own entrepreneurial venture. With an existing business you can be buying more than you bargained for if you don’t do your due diligence correctly. Every existing business has upsides and downsides and the due diligence period is a time of investigation to uncover what they are before you commit. It is most important to ensure that you are getting the right legal advice when buying existing an business.
Purchasing a Franchise
A franchise is a particular type of purchase. You are purchasing a system that will likely have an established track record and sophisticated operating procedures. If you want something that is “plug and play” it can be a great choice. It tends to suit people who like structure and seek to leverage off an established brand. You will be subject to the parameters of the franchise relationship which are on one hand constraining in terms of what can be done with the business but, on the other hand, are a useful safety net because a franchisor will have an obligation to protect the brand for the benefit of all. Like established businesses, franchises can often grow in value.
If you are deciding to buy an established business then this could be for you. Much of what we say in this guide also applies to franchising but franchising has special nuances and you may want to see our franchising page.
Where do you find a business?
Businesses for sale are found in a number of ways. Most will use a business broker to start because a broker will often have multiple listings in a particular industry to choose from. Many businesses are listed for sale on CommercialRealEstate.com.au or businessesforsale.com, as two examples. Still others are listed for sale through business magazines. Other ways of finding a business is via your own network of people that you know all of those who seek out strategic acquisitions.
Some businesses have a significant asset base and it is advisable to carefully assess the value of those assets, to ensure that you don’t unnecessarily overpay for them.
Other businesses, such as service businesses, are income driven, you will be more concerned as to how the customer base was acquired and how the income was derived.
Both of these elements are relevant to some businesses.
Market forces ultimately determine price. However, whether a purchaser pays too much or otherwise gets a “cracking deal” will typically depend on many factors, including the degree of motivation that the vendor has to sell and the research and assessment you carry out to otherwise persuade the vendor as to why your price is the right price, having regard to the all the conditions of the deal.
The seller, or the seller’s business broker, will generally ask you to sign a deed of confidentiality prior to carrying out your due diligence on the business in which you have shown interest. This will be especially important to a seller if you’re a competing business. If your intentions are true and sincere, signing a deed of confidentiality should be not be an issue for you.
Just make sure that you have the document reviewed by a lawyer before you sign the deed as these documents are usually extensive in their scope and you will want to make sure that you’re not being painted into a corner by a document that appears innocuous.
Consult your accountant
Seeking accounting advice before you purchase is very important. While a lawyer will talk about asset protection when it comes to advising you about options for a preferred entity for operating the business (eg. company / company trust), an accountant will talk to you about tax effectiveness having regard to your particular circumstances. An accountant will also be able to advise about matters relevant to the contract of sale, some of which are mentioned below under “Tax Consequences” on page 13.
Also, it is advisable to have an accountant to examine the financials of the business. In Victoria, if the sale price is $450,000 or less, specific disclosure as to the financials of the business for sale must be provided in the form a Section 52 Statement, which includes the financials for the previous two years. Many other states, however, such as NSW and Queensland do not have any such requirement.
One way or the other, whether before or after you enter into a heads of agreement or contract of sale of business, it is wise – if not critical – to carefully consider the financial hygiene of the business as part of a rigorous due diligence process.