In Short
- Understand the Business’s Value: Ensure you comprehend how the business’s asking price was determined, typically based on a multiple of earnings.
- Review Financial Records: Examine the business’s financial statements to confirm their accuracy and assess profitability.
- Clarify Purchase Details: Determine whether you’re buying the business’s assets or shares, as this affects your liabilities and obligations.
Tips for Businesses
Before acquiring a business, conduct thorough due diligence. This includes verifying financial records, understanding valuation methods, and clarifying the specifics of what you’re purchasing. Engaging professionals, such as lawyers and accountants, can help identify potential risks and ensure a smooth transaction.
Table of Contents
- What are the Business Operations and Industry of the business you are purchasing?
- What are your legal obligations?
- How Has the Business Been Valued?
- What Are You Purchasing?
- In Australia, what are the tax consequences involved in the purchase?
- What Are the Business’ Financial Records?
- Will You Retain Existing Employees?
- Due Diligence Period
- What Do Other Stakeholders Say?
- Have You Prepared a Business Plan and Financial Forecast?
- Has a Lawyer Reviewed the Sale of Business Agreement?
- Does the Business Require Any Permits or Licences?
- What Is the Handover Period?
- Key Takeaways
- Frequently Asked Questions
So, you have decided to leave the safety of a monthly pay cheque and become a business owner. Congratulations on taking the leap of faith. Although the stability of your income may not be quite the same, the reward of having a job you look forward to daily is priceless.
One of your first decisions is setting up a new business or buying an existing one. Although there is no right or wrong answer, you should carefully assess the merits of both and pick which suits your personal circumstances and expectations.
If you choose to purchase an existing business, you effectively buy the cash flows from existing customers. After identifying a target business, it is important to perform a detailed due diligence review before placing an offer to purchase. This review can prevent significant losses and provide valuable information to help you operate the business more effectively.
The list of questions and information to review will depend on the nature of the business and its industry. However, we have set out a preliminary list of essential due diligence questions to ask before buying a business.
What are the Business Operations and Industry of the business you are purchasing?
You should be considering key factors such as:
- whether the type and size of business is compatible with your interests, experience, personality and capital?;
- whether the business is part of a group or franchise that may restrict how it operates?;
- are there human resources policies, social media policies, procedure manuals and/or quality assurance programs in place?;
- why the business is for sale?; and/or
- is the industry in which the business operates expanding, contracting or remaining static?
What are your legal obligations?
When looking to purchase a business, one of the first things you should do is engage a lawyer who can assist you in understanding your obligations under the business structure or transferring assets.
It is also important to determine whether there are any legal proceedings against the business or the seller that might result in potential liabilities or risks to the business in the future or upon the completion of the sale.
Continue reading this article below the formHow Has the Business Been Valued?
Ask the vendor or their representative how they reached their asking price. Although there is no formula – after all, a business is worth what a third party is willing to pay – most will sell for a multiple of 2-4 times their earnings (after wages).
The valuation method can reveal important information about the business’s financial health and performance. For example, if the valuation is heavily based on assets rather than earnings, it might indicate that the business is not performing well operationally. Conversely, a strong, consistent cash flow valuation might suggest a stable, profitable business.
Understanding the valuation method can also help guide negotiations. If you disagree with the method used or its application, you can present alternative valuations or argue for adjustments based on your own analysis of the business’s worth.
What Are You Purchasing?
A business sale can be an asset sale or a share sale. An asset sale usually minimises the risks to the purchaser.
In Australian business acquisitions, choosing between a share sale and an asset sale can significantly impact the transaction’s structure, liabilities, and tax implications.
A share sale involves purchasing the entire company, including all its assets and liabilities, simplifying the transfer process but requiring more thorough due diligence. Conversely, an asset sale allows the buyer to cherry-pick specific assets, potentially avoiding certain liabilities, but may complicate matters such as contract assignments and employee transfers.
The structure of the business sale (asset sale vs share sale) can have significant tax implications. For example, an asset sale may allow for a step-up in the cost base of depreciable assets, while a share sale may enable the purchaser to access carried-forward tax losses. Consult with a tax professional to understand the best structure for your situation.
The decision between these two approaches should be made carefully, considering the specific circumstances of the business, the buyer’s objectives, and the advice of legal and financial professionals well-versed in Australian corporate and taxation law.
In Australia, what are the tax consequences involved in the purchase?
The tax consequences of buying a business in Australia can be quite complex and can significantly impact the overall cost and structure of the transaction.
Some key considerations include:
- Goods and Services Tax (GST), which may be applicable depending on whether the business is sold as a going concern;
- Capital Gains Tax (CGT) implications for both the buyer and seller; and stamp duty, which varies by state and territory.
- The purchase structure, whether an asset or share sale, can affect depreciation claims, the treatment of trading stock, and the potential transfer of tax losses.
- obligations related to employee entitlements,
- Fringe Benefits Tax (FBT); and superannuation guarantees.
Additionally, there may be implications for GST registration, Pay As You Go (PAYG) withholding and the application of small business CGT concessions.
Given the complexity of these issues and their potential to significantly impact the financial viability of the purchase, prospective buyers must conduct thorough tax due diligence and seek professional advice from tax experts well-versed in Australian tax law. This approach ensures compliance with Australian tax regulations and helps structure the purchase in the most tax-effective manner possible.
What Are the Business’ Financial Records?
At a minimum, we recommend you request and review the following:
- last two financial years’ accounts (Profit and Loss and Balance Sheets);
- current year financials;
- last four quarters of Business Activity Statements (BAS);
- last income tax return; and
- listing of every asset the sale will include.
Pull the financial records apart and confirm their accuracy. For example, compare coffee sales to the kilos of coffee the business purchases. You may even choose to examine website traffic to see if the numbers match what was provided. This will help determine any potential debts in the company.
Will You Retain Existing Employees?
Generally, if you only purchase the business’ assets, employee entitlements will not transfer to you as the new owner. Instead, the business’s current owner will terminate the employee’s relationship on the last day. The new owner may then choose to offer new contracts to the workers.
The question “Will You Retain Existing Employees?” is a critical consideration when purchasing a business as it has far-reaching implications for you and the buyer.
This decision intersects with various aspects of Australian employment law, particularly the Fair Work Act 2009, which governs the transfer of employee entitlements during a business sale. Retaining existing staff can ensure business continuity, preserve valuable institutional knowledge, and maintain established customer relationships.
However, it also means assuming ongoing employment costs and potential liabilities. The choice affects workplace culture, legal obligations regarding employee consultation, and compliance with existing enterprise agreements or awards.
Furthermore, it can impact the business’s reputation and market standing. Buyers must carefully weigh the benefits of retaining experienced staff against the opportunity for restructuring, all while navigating the complex landscape of Australian industrial relations.
Due Diligence Period
The due diligence period is a specified timeframe during which the potential business buyer thoroughly investigates and verifies all aspects of the target company before finalising the purchase. This period typically begins after the initial agreement (such as a letter of intent) is signed and before the final purchase agreement is executed. Depending on the final purchase agreement, it could also be a period of time after the agreement is signed but before settlement occurs.
During this time, the buyer:
- examines financial records;
- review legal documents and contracts;
- assesses operational processes;
- evaluates assets and liabilities;
- investigates market position and competitive landscape; and
- verifies compliance with relevant laws and regulations.
The primary purpose of the due diligence period is to allow the buyer to make an informed decision about the purchase, identify any potential risks or issues, and potentially renegotiate terms based on their findings. It’s a critical safeguard for the buyer, helping to ensure that they fully understand what they’re purchasing and that the business aligns with their expectations and valuation.
What Do Other Stakeholders Say?
Staff, suppliers, and customers are among the best sources of information. Take every opportunity to speak with them and ask questions about the business.
In Australia, it’s also worth checking if the business has any ongoing legal disputes or has been subject to regulatory actions. For this information, you can search the Australian Securities and Investments Commission (ASIC) registers and relevant court databases.
Have You Prepared a Business Plan and Financial Forecast?
Developing a solid business plan and financial forecast will help you understand the business’s drivers. You should use the plan as a key reference document when purchasing and operating your new business.
Has a Lawyer Reviewed the Sale of Business Agreement?
Ensure that you engage a lawyer to review the following carefully:
- sale of business agreement;
- lease; and
- any other agreements associated with the sale.
Does the Business Require Any Permits or Licences?
Different states and territories in Australia may have varying business licences and permit requirements. Check the website of your local state or territory government for specific requirements in your area. For example, you can refer to the NSW Government’s Business Licensing website in New South Wales.
It is important to request a copy of all relevant permits and licences (e.g., liquor licences or a local food permit). Speak directly with the regulatory bodies to ensure the permits are in good standing and can be transferred upon sale.
What Is the Handover Period?
The owner of a business generally carries with them a substantial amount of goodwill. During their time as business owners, they would have built relationships with their clients, and this can disappear if the owner just walks away from the business.
To help minimise this effect, it is a good idea to include a transaction and training period in the contract. This will introduce you to existing clients and allow the owner to answer any questions you might have about the business.
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Key Takeaways
Purchasing a business is an exciting and challenging venture. However, we cannot overstate the importance of conducting due diligence before signing a sale or share purchase agreement. To ensure you carry out all the necessary due diligence processes, go through the 13 questions to ask before buying a business we have outlined above. Take your time and do the work to ensure a smooth handover.
Remember, while this guide provides a good starting point, business purchases in Australia can be complex. It’s always advisable to seek professional legal and financial advice specific to your situation and the business you’re considering purchasing. This can help ensure you comply with all relevant Australian laws and regulations and make a well-informed decision.
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Frequently Asked Questions
What is the handover period?
A handover period commences once a seller has sold the business to a purchaser. This period allows the seller to introduce the purchaser to their clients and other business processes.
Which business financial records should I be requesting from the vendor?
You should request the accounts from the last two financial years, current-year financials, BAS from the last four quarters, the last income tax return, and a listing of every asset the sale will include.
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