Buying a Business

Buying a business or franchise is one of the many ways you can become a business owner.  The decision to buy a business or franchise can be easily rushed.  For such a significant decision you need to take time to consider some important factors before you sign any purchase or franchise agreement.

Buying a Business - the Seller and You
Before making the big decision to buy a business, make sure that you are comfortable with the:
  • reason for the sale of the business
  • level of co-operation from the current business owner;
  • type and size of the business in relation to your needs, experience, financial capacity and future plans;  and
  • business performance during the trial period.
Check the Operations of the Business

Sales

  • Check monthly and yearly sales patterns from the previous three years' financial statements
  • Compare sales trends with industry trends
  • Determine if the business is expanding, losing sales or remaining static
  • Value existing stock - ensure that it is not old or unsaleable and that there is sufficient stock
  • Identify the business customer base and percentage of sales from different customers.  Check to see if the customers will stay with the business if you purchase it
  • Find out if there are any local developments that may affect the business' sales.
Costs
  • Identify all fixed and variable costs
  • Include interest expenses on your borrowings for the business
  • Examine the costs recorded for the business and ensure costs are reasonable
  • Determine whether recorded depreciation costs are reasonable
  • Determine whether you will incur similar costs to the current business owner.
Profits
  • Analyse financial records, including balance sheets, profit and loss statements, Business Activity Statements and sales records
  • Determine whether the business generates sufficient profit for a reasonable income
  • Look at effects of increased or decreased sales on your profit
  • Compare gross profits with industry trends
  • Ensure that records have been kept well and comply with tax requirements.
Assets
  • Identify all asset items that you are buying.  Refer to an asset register/list, if available
  • Check depreciation schedule for equipment, fixtures, fittings, etc.
  • Determine book value, market value and replacement value of fixed assets.
  • Identify any current leases for fixed assets
  • Ensure equipment is in good working condition
  • Determine if any equipment is unnecessary for the business or obsolete.
Putting Pen to Paper - the Purchase Agreement
Closely review the draft purchase agreement as well as all the clauses in the agreement.  Ensure the purchase agreement:
  • includes all assets, including goodwill, 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.
Sale of Business and the GST
The supply of a business as a going concern is GST-free if the following requirements are met:
  • The purchaser must be registered or required to be registered for GST
  • The supply is for consideration
  • The supplier must carry on the business until it is sold
  • All things required for continued operation of the business must be supplied
  • Both parties must agree in writing that the supply is of a going concern.
Contacts
For advice and protection in buying a business or franchise you should seek the services of a solicitor, accountant or business adviser.
Solicitors and Business Law Specialists in your area can be located through your local Law Society click here for further information.
Accountants in your area can be located through the following peak accounting bodies:
CPA Australia, website: www.cpaaustralia.com.au
Institute of Chartered Accountants in Australia, website: www.icaa.org.au
Association of Taxation and Management Accountants, website: www.atma.com.au
National Institute of Accountants, website www.nia.org.au
Franchise Council of Australia 
For information on franchising matters, contact the industry association, phone 1300 669 030 or visit their website at www.franchise.org.au.

Business Advisers in your local Business Enterprise Centre can be located here or by phoning 1300 134 359.

 

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