If you're thinking about buying a small business, the most important thing is that you know exactly what you're buying. That's why you need to make sure you understand the business back to front.
Evaluating a business for purchase is complicated and it's always worth investing in professional assistance. So what should you know before buying?
Legal and tax
The legal and tax aspects of your potential business are really important. You need to be thinking about these things very early on. Some of the questions you might ask could be:
- What's the lease arrangement? Will it suit your needs? What restrictions are there?
- Are you relying on the seller's accountant's valuation of the business without an independent valuation?
- Has the business been served any government notices (health inspectors etc.) that you'll have to deal with?
- Do you understand your obligations under the intended business legal structure?
- Is the business or the seller involved in any legal proceedings?
- Were there other prospective purchasers? Why didn't they decide to buy?
- Do you have a solid and professionally informed plan for the legal and accounting aspects of the potential purchase?
- Are you aware of the relevant provisions of capital gains tax law if you sell the business?
- Have you considered stamp duty implications if there's any internal trading entity restructuring?
- Have you considered tax and GST implications?
- Do you know how to value assets for the best tax advantage?
- Does the draft contract identify specifically the assets you're purchasing, the liabilities you're assuming and the precise date and time when you'd take over the business?
Finances and sales
The performance of the business is obviously essential to your decision to buy. But understanding the health of a business can actually be really complex. Consider the following:
- Have you analysed recent financial records, including balance sheets, profit and loss statements, tax returns, purchases and sales records and bank statements?
- Will you have to build up your own accounts receivable? Have you worked out how this will affect your cash flow?
- Are sales records reliable and detailed?
- What are the sales patterns year-by-year and month-by-month? Is the pattern seasonal or related to some business cycle?
- Are you sure all sales figures shown are for this business, and that the seller hasn't added sales from another business?
- Is the product or service likely to maintain or improve its marketability or is it in danger of becoming over-sold, out of style or obsolete?
- Is a particular salesperson critical to success? If so, will you be able to retain that person in your employment?
- Does a small percentage of customers represent a large percentage of sales?
- Are any goods on warranty? If so, should you make a financial allowance for possible warranty commitments?
- Will customers expect you to make refunds or warranties even in instances when you're not legally obliged to do so?
Business operations and industry
The business' operations and industry should be a significant part of your research – you can't buy a business without understanding this thoroughly.
- Is the type and size of business well-suited to you and your interests, experience, personality and capital?
- Is the business part of a group or franchise that may restrict how it operates?
- Do you know the real reason why the business is for sale?
- Is the seller willing to sign an agreement for restrictive covenant?
- Will the seller train and help you after you buy?
- Has the personality of the seller been critical to the business's success to date?
- What's the competition like?
- What's the state of the industry? Is government likely to regulate/deregulate any time soon?
- Will you be able to continue buying the products from existing suppliers?
- Are staff happy? Will they stay with you?
An accurate audit of business assets means that you can make an accurate valuation and not pay too much.
- Do you know exactly what you are buying and not buying? Is everything itemised and clearly laid out?
- Are you buying shares in the organisation (if valid)?
- Are you buying inventory or work-in-progress?
- Have you decided what intangibles you want, such as mailing lists, business name, exclusive rights or leases?
- Do you get equipment in the sale? What kind of condition is it in?
Expenses and debts
A comprehensive understanding of expenses and debts ensures that you're not taking on more risk than necessary. It's making sure there's no unpleasant surprises!
- Are all expenses shown?
- Are there any annual expenses due soon?
- Are there new or increased expenses you should anticipate?
- What maintenance agreements are in place and what do they cover? Are they paid to the current date?
- What expenses do similar businesses have?
- What debts are you taking on?
Buying a business is something that requires a lot of business expertise and research. You don't have to be a business expert though, that's where we can help you out.
Jensen Ma is an Accredited Immigration Law Specialist with over 20 years experience across immigration, commercial and business law.