10 Key Things to Think About Before Buying a Business.
1. Do you want to buy an owner-operated business or a franchised business?
The main difference is that an owner-operated business is independent, and you will own all of the assets associated with that business. However, it may be harder to build a reputation in the community starting from scratch. With a franchised business, you do not own all of the assets used in that business (such as intellectual property and customer goodwill), you need to enter into a franchise agreement with the franchisor which will set out how you are required to run the business, and you will need to pay ongoing fees to the franchisor for their support and access to their intellectual property and system. However, you do have the benefit of operating a well-established system that is recognisable in the community, and the support of the franchisor to help you succeed.
2. Do you want to run a mobile business, an online business, or a premises-based business?
This comes down to what you prefer, the type of business you are looking to buy, and the finances you have available to begin with. Operating a premises-based business with a shopfront means that you will need a lease and will need to pay rent and outgoings to the landlord. You’ll also need to pay a bank guarantee or security deposit up front. If you run a mobile business, you will need to purchase a suitable vehicle and equipment. An online business will require you to invest in a good website and you may need to purchase and warehouse stock.
3. Do you know what legal structure will you use to buy the business?
You can operate as a sole trader (an individual), as a company, as a partnership, or via a trust. The most appropriate legal structure for you will depend on who will be involved in your business with you (e.g., if you are going into business with other people you may want to set up a company or a partnership), the finances you have available to spend on setting up your structure (e.g., it is more expensive to set up a company and a trust than a sole trader structure), and your plans for the future, including whether you want to bring on investors (a company structure is usually preferred by investors). Also, how many personal assets do you have that need protecting from your business operations?
4. You will need to register for an Australian Business Number (ABN) and for Goods and services tax (GST) in order to buy the business.
In Australia, you need to have an ABN in order to carry on business, and GST registration is required for tax reasons when you buy a business. In most cases, you do not need to pay GST to buy a business if it is ongoing (as you will get what is called the ‘going concern exemption’), however, in other cases, you may need to pay GST (10%) on the purchase price amount. In either case, most business sale contracts require that the buyer is registered for GST purposes in case GST is payable.
5. Do you need finance to buy the business?
In many cases, a buyer will need to obtain finance from a bank in order to buy the business. If you do need finance, then any offer you make to the seller must be made ‘subject to finance’. You should allow plenty of time to obtain finance between signing a formal contract of sale and the target date for you to take over the business (settlement). An alternative to getting finance or paying from your own cash is to negotiate vendor finance, whereby you pay the purchase in installments over time.
6. What will you need to run this business?
You should make a list of everything you will need to start operating. This may include particular items of equipment, a business phone number, email address and website. You may need specific licenses or permits depending on the nature of your business. You could also need employees to help you operate the business. The seller of the business should transfer you everything you will need to successfully operate the business from the day you take over, however, there may be certain things you need to organise yourself, such as business licenses, supply contracts (e.g., for EFTPOS, internet, electricity, etc), internal software systems that you will use (e.g., Xero), etc.
7. You should sign a non-disclosure agreement (also called a confidentiality agreement) with the seller before you make an offer to purchase.
This should be a 2-way agreement so that it protects any information you provide to the seller about yourself and your offer to purchase their business. Sellers are usually more willing to provide potential buyers with information about their business if they know it is protected by a confidentiality agreement.
8. Do you intend to work in the business, or will you hire a manager to run things for you?
This will of course depend on your cash flow and your individual circumstances; however, it is important to keep in mind that if you are buying a franchised business, most franchisors will require the directors/owners to work full time in the business. It is also often recommended to keep on existing employees (at least the key ones) as they can help run the business smoothly when you take over.
9. Do you have good advisors in place ready to assist you?
It is very beneficial to have a good accountant and lawyer assist you with your business purchase. Your accountant can review the financials of the business and let you know if it is worth the amount the seller wants for it. They can also help you with structuring your business to minimise your tax obligations. A lawyer experienced in business sales and purchases will be able to help you negotiate a contract in your favour, to ensure you are legally protected in your purchase.
10. Do you understand the process of buying a business?
The first step is to enter into a non-disclosure agreement, make an offer to the seller, and agree on the commercial terms of your purchase with the seller. The key things to agree on are the purchase price and the assets that you are buying. You and the seller may then sign an initial offer to agree on these terms. Following this, the seller will engage their lawyer to prepare the formal business sale contract. Once it is prepared, they will provide it to you to review. You should then obtain advice from your lawyer, and negotiate any changes they recommend. Once the contract is agreed upon with the seller, you both will sign it. After signing, you will both prepare for settlement, which is the day you take over the business and pay the purchase price. This will likely be a few weeks after the contract is signed. On the settlement date, you will officially become the owner of the business.
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