You have made up your mind to buy an established going concern business the following points are made to allow you to be better informed. Buying any business involves the investment of a significant amount of your time and of your capital. In relation to the capital this may involve the sale of an investment, which in both events can become complex. It may involve capital gains issues or other taxation implications it is therefore advisable to seek both legal and accounting advice in the process. Acquiring the selected business can also require you to deal with practical and legal issues common to most business acquisitions all of the above need to be carefully considered.
How Much Do I Want Earn From The Business = How Much Do I Need To Spend?
Determine first what level of income do you need from the business as this will determine how much you will need to invest in the business enterprise, this investment will need to include the purchase price of the goodwill, the plant and equipment, vehicles (if any), stock in trade and work in progress (WIP) (WIP where the business manufactures a product or a service provider where progress payments are required). Furthermore working capital and seasonal impact on cash flow must also be factored into the amount of capital you will be required to invest. Speaking with your business broker, or an industry finance professional such as a finance broker, your banker and your accountant can assist you in determining a realistic price point based on your investment ability and your management ability. Also keep in mind your own ability, have you the skills and training to manage the business or do you need to employ management to assist you as this will impact the return you have to pay yourself, service any debt and fund the day to day cash requirements of the business.
In addition to the above capital requirements, i.e., purchase price, and working capital, you need to factor into the amount required settlement fees and charges, stamp duty, legal fees, bank charges, typically these amount to around 5% of the purchase price of your business. Also consider such other outlays as utility bonds or deposits, landlord’s rental bond or deposit, etc. These costs can be significant and should be considered as part of your overall investment particularly since they will be included in the cost base for Capital Gains Tax (CGT) purposes in the future.
The Business Structure Best Suited
It is advisable that before you sign any contract, first obtain advice on the most appropriate entity and structure to ensure your protection and to ensure tax minimisation and asset protection as if the entity is changed after the contract has been entered into, there is the possibility of having to pay double stamp duty. Again we recommend you seek professional advice from your professional advisor, accountant and solicitor early in the acquisition process. If you intend to go into business with a business partner, it is very important to ensure you have agreed on the type of commercial arrangement you will enter into. This could be a simple partnership or a joint venture, what ever it is, the right document and terms such as distributions of profit, sharing of losses, funding working capital and exit strategies to name just a few. Again we recommend you seek professional advice from your professional advisor, accountant and solicitor early in the acquisition process.
The Method of Purchase – Asset Purchase vs. Share Purchase
In some cases, you will be given the choice when buying a business of either buying the business assets from the Seller, i.e., goodwill, plant, equipment, chattels, and stock in trade, or if the business is held in a company, you maybe able to consider the purchase of all of the issued shares in the capital of that company. There are benefits to both parties for each method, if you decide on a share purchase, it is imperative that you not only carry out a thorough due diligence on the business but also on the books of the company. More importantly with the sale of shares it is advisable to obtain from the seller and the seller’s related entities extensive warranties, guaranties and indemnities as you will also be acquiring the liabilities of the company.
The Sale & Purchase Contract of Share Sale Agreement – Commercial Terms
The following points should be considered in structuring the Contract of Agreement:
- The correct purchasing entity nominated and described; as previously mentioned if there is a change made in the name of the entity purchasing after the contract has been entered into, there is the possibility of having to pay double stamp duty.
- Typical Conditions Precedent; outline the conditions which need to be fulfilled prior to the contract/agreement becoming unconditional. These often include a due diligence provision and a subject to finance provision, these conditions and the time when they are to occur should also be agreed between the parties.
- Due Diligence Investigation; your due diligence should always be completed prior to the contract becoming unconditional. The due diligence process should always include legal and financial due diligence processes. It is recommended that these processes be carried out by competent professionals to verify the legal and accounting standing of the business and its performance. The cost of undertaking due diligence is at the cost of the buyer. It can be considered as essential insurance to insure you are getting what you are paying for, a viable proven business.
- Payment of A Deposit; it is normal to pay a deposit on the signing of the contract, the amount of the deposit is normally 10% of the purchase price excluding stock, however the parties will determine to whom it is to be paid and the amount agreed to be paid prior to entering into the contract. Usually the Seller’s Agent is the Stakeholder for the parties.
- Essential Assets of the Business; the registered business name and other essential intellectual property such but not limited to trade marks, logos, patents, designs, web sites, email addresses, blogs, telephone numbers, facsimile numbers, mobile numbers registered by the business and other assets such as procedure manuals, data bases and specific software developed by the business and employed in the business must all be transferred with the business to the buyer.
- License/s, Permit/s, Certificate/s and Consent/s; all or at least some of the aforementioned may be required for some businesses, as the buyer, it is essential for you to know what of the above (if any) you will require to operate the business. You may also be required to attend a registered course or hold some specific qualifications to be able to conduct the business.
- The Business Premises Lease; if the business you are purchasing is housed in leasehold premises as opposed to freehold title to the premises that you will own, then the existing lease must be transferred to you as the buyer of that business. Having established that a lease is in place, as the buyer, you must consider the remaining terms of the lease, renewal options and rental escalations as all of these points are essential to the security of the as all of these points could b\have an impact on the future profitability of the business and its ability to be sold on in the future.
- Contracts For Supply of Goods and Services; the business you are buying may be required to hold contracts to secure the ongoing supply of a good/s and or specific services, you should ensure that these agreements are transferable and that you can secure the same benefits after the change over of ownership. It is advisable to secure new contracts in your name or effect an assignment of the existing contracts. These contracts may include service agreements, rental agreements, hire of equipment agreements and license agreements for the legal use of such things as software, external signs, etc.
- Stock In Trade and Work In Progress; where stock and work in progress exists they may be included in the purchase price (in the case of a walk-in-walk out sale basis). Generally, stock In Trade and Work In Progress (WIP) is a consideration in addition to the purchase price and should be reflected in the contract. Where the stock and or WIP are not included in the purchase price, then you should agree a maximum value that the buyer must pay for such stock and WIP at settlement. If the value of the stock and WIP is found to be greater than the agreed limit, then you should be entitled to reject items of the stock to reduce the value of the stock and WIP to the agreed limits. To ensure you get what you are paying for a stock take and a valuation of the WIP should be conducted between the parties on the evening before or the morning of settlement. Unless agreed, you are not obliged to accept broken or damaged stock, stock with expired use-by dates as a few examples.
- Handover Of The Business and Training; It is normal procedure that some basic training of the buyer by the seller of the business is provided and this must be agreed at the time of negotiating the contract. The buyer may require the seller to provide some training or tuition prior to or after settlement.
- Employees and Employees’ Entitlements; It is normal that employee entitlements need to be considered for a number of practical and important reasons. The contract will generally require the seller of the business to terminate the employees of the business from the date of settlement. It is also usual for the buyer to reemploy the seller’s staff on the same terms and conditions as applied under the seller’s ownership. All accrued entitlements can either be paid to the employees by the seller prior to settlement or these entitlements can transferred to the buyer at settlement who then assumes responsibility of the payments of such accrued entitlements as they fall due to the employees. The method is to be discussed and agreement made and recorded in the contract of sale.
- Non Competition From the Seller After Settlement; It is usual for a Seller’s Restraint to be included in the contract. The Seller’s Restraint prohibits the seller from competing with the business being purchased. The terms of such a restraint must be recorded in the contract and must specify the seller will not compete with the business being purchased for an agreed period of time and an agreed area from the business within which the seller will not be allowed to complete with the business being sold.