If you’re considering buying a business, give some thought to these issues before signing on the dotted line
Often, buying a business in Victoria is a complex task and there are several issues that you should consider in the process, including due diligence, checking lease and financial records, appropriate business structures, whether there is any trial or transition period, and GST and stamp duty issues.
Here are the six most important things to look out for when purchasing a business.
1. Due Diligence: analyse, analyse, analyse
Due diligence is the process of evaluating a business before deciding to buy. It’s a type of investigation into business financials, including revenue, profit and loss, assets and liabilities, and valuation. You should assess whether it has any commercial potential. Competitors, management structure and any risks should also be identified and analysed. A key focus of this process is working out whether the business is likely to meet your needs.
You need to understand everything there is to know about how the business operates and make sure it is right for you. For example, questions may include:
- Are certain licenses or permits required? Is it a franchise?
- Is stock or equipment included in the purchase price? Is it owned by the seller? Is it in good condition?
- Is an inspection needed? For example, a health inspection for the purchase of café/restaurant businesses.
- Does the purchase of the business depend upon a sale of the business premises? Or is a transfer of lease required?
- Is it necessary to transfer the business’s intellectual property such as business names or trademarks?
- Is there goodwill attached to the business? Have you considered an appropriate valuation for the goodwill compared with the other assets being sold?
- Are there employee and supplier contracts? If so, how will they be transferred?
- Who are the competitors and where are they located?
2. Check the financial records
Checking the financial records forms part of the due diligence process, but it’s also an important step in its own right.
We recommended that you request access to the business’s past three years of financial records, at least, including tax returns, profit and loss statements, and sales figures.
For more complex acquisitions, consider engaging professionals to conduct your due diligence. They may include lawyers, accountants and other business experts. The bigger the investment, the more important it is to assemble a team who can stress test the supplied financial figures and perform forecasts on the basis of the latest audited accounts (where possible).
3. Check the lease
If the business premises are rented, it is vital that you get a copy of the lease so you are aware of your obligations. You must also check that the lease is capable of being assigned to you. This is often a critical aspect of a physical business changing hands. If not handled correctly, leasing issues can undo many business sales. You may need to engage a commercial property lawyer to help with this process.
You should also be aware that the Retail Leases Act allows a landlord to inspect a prospective tenant’s finances to ensure they can pay the rent. Normally, the consent of the landlord is required as a condition of the sale of the business.
4. Consider your business structure
Consider an appropriate structure to buy the business. We often see purchasers using corporations and trusts. Understand the different taxation and legal implications of the structure of your purchasing vehicle and choose the structure that best suits you.
Also consider the impact that a structure may have on decision making. For example, there will be different consultation and voting requirements for corporations and partnerships.
5. Think about transition
It may be necessary to ensure that the seller introduces the purchaser to key elements such as:
- Other suppliers
You need to have a clear agreement about this in advance, especially the level of involvement from the seller during this period.
6. Understand your GST and stamp duty obligations
If the business is being sold as a going concern, the sale may be GST-free with no extra stamp duty payable. We recommend that you seek appropriate tax advice. The Australian Taxation Office (ATO) has a specific set of requirements that must be met before the sale can be characterised as a going concern. If the sale doesn’t meet these requirements, GST may be payable on the sale. In some cases, this is a significant extra expense. We recommend that you seek taxation advice when undertaking due diligence to ensure you’ve budgeted for any GST or stamp duty associated with the sale.
The final word
There are many issues to consider when acquiring a business. It is essential to ensure you are properly advised from both a legal and tax/accounting perspective. Contact us to learn more about our commercial team’s significant experience in advising clients who are buying a business in Victoria.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can receive from marshalls+dent+wilmoth and other relevant experts.