Q What are the first steps I should take in buying a business of my own?
- You should determine the structure you would like your business to take – whether it be sole trader, partnership or company.
- Get independent advice from your solicitor and or accountant and any other key people you can identify that might help you to make an informed decision about your purchase; and
- Once you have decided on the business you would like to buy, insist that any representations made to you by the seller or its agents in respect of the purchase are put in writing.
Q How do I decide what structure my business should take?
The best thing to do is ask for accounting and legal advice, but as a guide you should think about:
- The expected income of the business.
- The sort of personal liability you will have or are prepared to have.
- The value of the assets of the business.
- Taxation issues. For example, capital gains tax, goods and services tax and income tax payable.
- Who the owners of the business will be and their shared rights and obligations.
Q Before I sign a purchase agreement to buy the business I’m interested in, what should I check in relation to the business’ sales?
- Check the monthly and yearly sales patterns by looking at the last three years’ financial statements.
- Determine (based on those figures) whether the business is expanding, or remaining static or is in decline.
- Review the existing stock to ensure that it is not old or unsaleable. You should also check that there is sufficient stock.
- Identify the customer base of the business and the percentage of sales each customer (particularly significant customers) represents.
- Check to see if the customers will stay with the business if you purchase it.
- See if you can continue to buy from existing stockists.
- Research whether there are any local developments proposed or pending that may have an effect on your prospective business' sales.
Q What should I check in relation to the business’ costs?
- Review all variable and/or fixed costs including any government costs, insurance, etc.
- Examine the costs recorded for the business in the past year or two and ensure costs are reasonable.
- Determine whether the costs you might incur are similar to those currently incurred.
- Determine whether the depreciation costs recorded are reasonable.
Q How will I know what sort of profit I could hope to gain from the business?
- Review the financial records of the company by looking at the balance sheets, Business Activity Statements, profit and loss statements, and sales history.
- Compare the gross profits with industry trends.
- Make sure you review profit after allowing an equitable salary for yourself and any employees.
- Ensure that adequate records have been kept and that they comply with tax requirements.
Q How do I determine the value of the business’ assets?
- Identify those assets that will form part of the purchase.
- Check the depreciation schedule for equipment, fixtures, fittings, and any other business assets.
- Determine the book value, market value and replacement value of fixed assets.
Q What should I look for in the draft purchase contract supplied?
Both you and your lawyer and/or accountant should thoroughly review draft purchase agreement as well as all the clauses in the agreement. Ensure that the contract:
- includes all assets, including goodwill (that is, the cost of taking over an established business with established suppliers, clientele, cash flows, trained employees, etc) that are being purchased; and
- clearly states all liabilities that you will assume upon buying the business, and includes clauses that will protect you as a buyer and covers issues of obtaining finance, inspecting all records, receiving necessary licences and rights and ensuring a minimum trading level during the trial period.
Q I have a business name in mind – how do I register it?
You will have to determine whether the name you have in mind:
- is being used by another business.
- Would or might be considered obscene.
- might be confused with an already existing business.
Once you have your business name in mind, go to http://www.asic.gov.au which shows all registered Australian names, company names and business names in all the states and territories of Australia.