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Buying a Business – What to Consider

Buying a business can be exciting but also daunting, which means careful consideration and thought needs to be applied. Although it may initially seem like a simple decision, there are several essential steps to consider throughout the acquisition process.

So you can approach the buying situation more relaxed and knowledgeable, I have outlined the typical factors to consider and events to comprehend when exploring the purchase of a new business.

Structure

Firstly, it is important to understand what you are buying – whether that is the shares in a company, units in a trust, or the business assets and associated goodwill. The way in which you structure the acquisition of a business will impact the key considerations which need to be appropriately thought out.

Acquiring the shares in a company or units in a trust may be the simplest approach to buying a business, but can also come with any historic liabilities that the entity may have. These liabilities may include secured and unsecured debt, unpaid superannuation and wages, outstanding creditors, claims against the business by employees or other parties. You should check with your lawyer that sufficient warranties are included in the contract, to minimise your potential exposure to these liabilities.

Alternatively acquiring the business assets and associated goodwill comes without the historical liabilities of the business, but requires a new structure to be set up prior to completion of the transaction. All contracts with customers, suppliers and employees will need to be transferred or re-issued in the name of the new entity.

In some cases, the acquisition of a new business may be linked to the acquisition of the property that the business operates from. In this case, the entity in which you intend to own the property may be a different entity to which the business will operate from.

Due Diligence

This is the process of analysing information in order to make an informed decision. In the case of acquiring a business, the two most common forms of due diligence are financial and legal due diligence. Completion of a financial and legal due diligence will help you to be comfortable that the business that you are acquiring is what the vendors/agents say it is.

A financial due diligence is where your accountant or adviser analyses information provided by the vendor such as:

  • Financial statements
  • Income tax returns
  • Business activity statements
  • Sales ledgers
  • Payroll reports
  • Profit and loss and cash flow projections

A legal due diligence will be undertaken by your solicitor and analyses information such as:

  • Customer and supplier contracts
  • Employment contracts
  • Lease contracts
  • Ownership of assets, and associated debt and registered charges

Throughout the due diligence process, your advisers will keep you informed of their findings. The results of the due diligence process can impact the structure, price or finer details of a deal, and can be a key bargaining chip with the vendor – so don’t skip this process!

Finance

In most cases, additional finance by way of a bank loan or similar will be required to fund the acquisition of a business. It is important that you have a responsive and communicative banker or broker who will keep you updated on your finance application.

Common finance considerations include:

  • What security is being offered?
  • Is it only the purchase price being financed, or is the business requesting an additional amount to assist with working capital?
  • Is the business requesting an overdraft?
  • Are the loan repayments inclusive of principal or are they interest only?
  • How long is the loan term?

Contract

Similar to purchasing a property, a business acquisition requires a contract to be drawn up (usually by the vendor or their solicitor). It is important to have a solicitor who is experienced in the field to review the contract and explain your obligations and the terms and conditions to you.

A key item will be the purchase price and payment terms e.g. is the amount payable in full at settlement, or are payments being made over a period of time? Is the price subject to an earn out agreement?

Upon review of the contract and it being satisfactory for both parties, you will be asked to sign the contract and exchange with the vendor.

There will generally be a settlement date specified in the contract. Upon settlement, you will be the operator of your new business!

It is now important to ensure that, depending on the structure of the acquisition, that you have access to everything you are entitled to, including:

  • Bank accounts are now accessible
  • All software used within the business is accessible
  • You have control over all business assets (including equipment, trademarks, websites, domain names and other intellectual property) and they are held by the correct entity
Business Strategy

What’s Next?

Buying a business, whether for the first time or the fifth, can be a challenging decision and process to undertake, so please make sure you talk with us to gain clear insights and guidance. Our team at BLG Business Advisers are Wollongong accountants who service right around Australia. There is no cost or commitment involved in an initial chat with us, which leaves you free to decide if we are the right fit for you.

Whatever you decide we wish you and your business every success!

*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is relevant at the time of publishing and is subject to change*
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