Many people start a business from scratch but sometimes it is easier if you purchase a business as a going concern. But it is important that you do have some general business experience and preferably some experience in the industry that the business relates.
Obviously when buying a business you will be selecting an appropriate type of business that you wish to purchase and you should work out the limits of your budget. If you need to borrow to finance the purchase then you should make appropriate approaches to lending institutions to see what terms they will require including interest rates and what equity they require you to have in the purchase i.e. the percentage of the equity as compared to the loan. You may also need working capital after the purchase.
As a purchaser of a business you must be very careful to do what is called your due diligence which means that you need to be satisfied that the business is viable and that it will achieve a return that is comparable to what has been represented by the Vendor or the Vendor’s Agent.
At this very early stage you need to retain an Accountant who is experienced in looking at this type of business to look at the books of the business. Your relationship with your Accountant will be an on-going relationship as you need to be able to continue to be on top of things as far as the accounts are concerned. You should speak to your Accountant about what kinds of taxes will apply to the business with a consideration of GST, capital gains tax and stamp duty implications.
At an early stage, probably after you have spoken to your Accountant you should seek legal advice and normally there will be a Contract prepared by the Vendor’s Solicitor. There will be issues that may arise from the Contract itself which you will need to discuss with your Solicitor and these may include:
• Requirements for any lease of business premises;
• Inventory of Assets;
• Employees;
• Goodwill;
• Restraint of Trade;
• Intellectual Property; and
• The settlement date and particularly penalties that may be incurred if settlement is not on time.
You will need to speak to your Accountant and your Solicitor relating to what type of entity should be set up to purchase the business particularly as there may be some tax advantages in certain types of entities.
Apart from the work done by your Accountant and Solicitor there are things that you can do which probably will be very relevant and you should do the following:
1. Find out why the Vendor is selling the business. It may simply be that the Vendor is retiring or something like that. The Vendor might have to sell because of financial reasons and may be under some time pressure. You should work out whether there is a possibility that a competitor may be setting up nearby and that might be the reason why the Vendor is selling;
2. It would be a good idea to research the market and the main competitors of the business;
3. If possible talk to customers and others involved such as suppliers;
4. In this age it is probably a good idea to check social media and internet information relating to the business particularly as regards to opinions expressed about the business;
5. Also make an effort to visit the business at various times to see how it is actually functioning; and
6. If possible, talk to any of the employees as they might have some insight into the way the business is run.
7. Identify any key employees who are not part of the Vendor and if necessary consider employing key employees.
Hopefully when you make the final decision to purchase the business, it is the right decision and once you have undertaken all the pre-purchase enquiries and investigations hopefully it will then just be a matter of putting in the hard work to continue to run the business as a viable entity.
This article is intended to be for information and educational purposes only and cannot be relied upon as legal advice. The information may not apply to your circumstances or to your particular situation. If you need specific advice or you have any questions, we welcome you to contact us directly.
