Buying a business in NSW: 6 handy tips to consider.
Buying an existing business is a great way to leverage an established brand and operating environment in return for almost immediate profit. However, it’s easy to get swept up in all the excitement, making it crucial to do your due diligence to help minimise risks while maximising confidence in the purchase. Here are a few key issues to consider during the decision making process.
- Perform due diligence
Take your time and do your due diligence up front on the business in question. Be sure to examine the financials, management structure, reputation and whether the business has good product/market fit for commercial potential. Evaluate the competitors, market size, and any risks or likely future risks with any new legislation coming down the line.
Some questions to ask may include:
- What does the financials of the business look like, including things like the revenue, profit and loss, assets and liabilities.
- Why is the current business owner selling? You may need to dig a little deeper here to understand the full picture.
- Is the business a franchise? What conditions will this impose?
- Is there good market fit for the product or service in question? Is there a ready audience for the business in question, and will the audience size sustain the investment well into the future?
- Does the purchase price include stock or equipment that will be needed to run the business, or will you need to fund these as well?
- Are the premises rented? Can the lease be assigned to you?
- Do you need any licences or permits to run this business?
- Do you need to organise transferral of the business’s IP like business names and trademarks?
- Who are the competitors of the business? Where are they located and will they pose a threat to the success of the business in future?
- Is there goodwill attached to the business, and has this been valued?
- Will staff within the business stay on, and how will their contracts be transferred? Are there any bonuses or long-standing leave entitlements to consider?
- How was the purchase price derived? The factors you need to consider are industry dependant, but will generally always include goodwill, assets and yearly profit. It’s a good idea to get an independent valuation here as well.
- Evaluate the financial records
An accountant can help review the business and evaluate key financial indicators like sales, profits, debts, expenses and cash flow. They can also reveal any red flags and anomalies in the figures which may need further investigation.
At a bare minimum, it’s best practice to ask for the last 3 years of financial records, including tax returns, sales figures, BAS lodgements, a list of creditors and debtors and profit and loss statements. Annual reports will also provide a wealth of information.
- Consider the business structure
What structure will you use to buy the business? It’s important to explore all options with your accountant, as the structure you land on will have different tax and legal implications and can also impact on future decision-making capabilities. As an example, there will be different voting requirements for corporations and partnerships vs an individual ownership structure.
Engaging a professional accounting team will mean you maximise your return and set the business up correctly, right from the beginning.
- Think about all aspects of the transition period
Think about what happens after the transaction. Ensure you have a clear agreement in place for the seller to introduce the purchase to key parts of the business such as:
- Customers –How is customer data held? Will they remain loyal when you take over? Check sales contracts to see what future sales are guaranteed.
- Contacts – Who are the key suppliers and stakeholders to the business? How do they feel about the business vs their competitors?
- Staff – Are employees generally happy? Will they remain with the business during the transition period? If not, are procedures documented to help the hiring process?
- Check legal rights and obligations
Check what legal obligations you are entering into along with the purchase of the business, especially if it’s in a field you’re not overly familiar with.
- Check ASIC to verify company details
- Contact the NSW Fair Trading office for a record of any unscrupulous trading
- Review government regulations and ensure the business has the right licences and permits it needs to operate
- Check whether IP is protected through licences, patents and trademarks and whether these will be transferred in the sale
- Check any worker entitlements including leave or compulsory superannuation
- Check whether workers’ compensation premiums are up to date.
- Check the lease and any agreements binding the business and ask for copies. Is there a right to renew on the lease and if not, could you find another suitable location?
- Understand your GST and stamp duty obligations
Is the business being sold as a going concern? If so, the sale may be GST-free with no extra stamp duty payable. It’s important to note that the ATO has a specific set of requirements that must be met before the sale is considered of going concern. If the business doesn’t meet these requirements, GST may be payable, which could pose a significant additional expense.
It’s important to seek professional tax advice here, to ensure all obligations have been budgeted for upfront.
While buying an existing business in NSW is an exciting time, it’s important to do your due diligence and ensure all factors have been considered. A good professional team made up of accountants and lawyers can help with identifying key questions, red flags, and ensuring the business is compliant prior to signing on the dotted line.
If this sounds like something you need support with, please don’t hesitate to get in touch with the team at Economos. We’ve partnered with countless clients to help them through the daunting task of purchasing a business.