How to buy a business without getting burned
Buying a business can be a significant commitment of time and money, so you won’t want to find out there are issues after settlement, especially ones that come at a big cost. Even if you’re not a first time buyer, following the process can seem complex. If you’re looking to buy a business, our business lawyers have put together a step by step guide to doing it right.
1. Choosing the right business structure
There are four types of structures for businesses: Sole trader, partnership, company and trading trust. Choosing the right one will depend on your business goals, objectives and personal circumstances. Each structure has advantages and disadvantages, so it’s best to talk to a business lawyer about what structure will offer you a suitable framework to operate your business, balanced against the appropriate level of risk. There is also the option to buy shares or assets in a business.
2. Securing finance
You may be able to self-fund the purchase of a business, which will make the process straightforward, or you may need to get a loan from a bank or other financial institution. Criteria varies from one institution to another, so it would pay to talk to your business lawyer as part of the due diligence process.
3. Calculating what a business is worth
Tangible assets make up the first part of a business’s worth. This may include chattels such as equipment, fittings, furniture, machinery and vehicles.
Next is the intangible asset usually referred to as ‘goodwill,’ which represents the strength of the business’s brand, its reputation in the business community, portfolio of clients as so forth. The value of the ‘goodwill’ is also factored into the purchase price.
Stock on hand is usually included as an estimate, with the actual figure determined by a stocktake on settlement. So this figure is not an unknown, the Sale and Purchase Agreement should provide a maximum percentage by which this figure can change to give you a reliable value range for the stock.
4. Determining tax obligations
Businesses that continue to operate when sold to a new owner are considered to be ‘a going concern.’ In this situation, the tax legislation allows the sale to be zero-rated for GST. If both buyer and vendor are GST registered, there will be no GST to pay.
As part of your due diligence process, you’ll want to make sure the tangible assets are valued at an accurate market rate to avoid paying too much tax. It’s always prudent to get some sound tax advice to ensure you’re meeting your tax obligations.
5. Ensuring continued profitability
If the vendor doesn’t provide you with a ‘turnover warranty,’ your should ask for one. This warranty states the average weekly turnover for the business, including any irregular events that have led to peaks and troughs in turnover for the period. Not having this information may amount to misrepresentation.
6. Include a restraint of trade
A restraint of trade is designed to protect your interests in the business after the sale is complete. It prevents the vendor from directly competing against you by running a similar business in the same geographic area, usually within a set time limit.
The provisions must be fair and reasonable, but you need to make sure you’re sufficiently covered to prevent any directors, shareholders and employees from competing against you.
7. Don’t forget intellectual property
This is one of the most common steps that gets overlooked when buying a business. IP includes the company website, social media or other internet content. Make sure you include any IP in the Sale and Purchase Agreement.
8. Obtaining leasing arrangements
If the business is operated from leased premises and you want to continue to operate from that location, you need to obtain the right to occupy the premises with acceptable terms and conditions. If there is an existing lease, you’ll need to get the landlord’s consent. Take a look at our recent article which looks at this situation from the landlord’s perspective.
9. Organise employment contracts
If you want to retain some or all of the existing employees, you’ll need to offer them new employment contracts as they are made redundant by the sale of the business. Existing employees have knowledge, experience and relationships with customers, so managing this process could have a significant impact on the successful continued operation of that business. You may also want to restructure roles and responsibilities, so talk to our business lawyers if you need advice.