8 STEPS TO BUYING A BUSINESS

Presented by Owen Hodge Lawyers

ARE YOU CONSIDERING

BUYING OR ACQUIRING AN EXISTING BUSINESS?

THIS PRESENTATION DISCUSSES

8 BASIC STEPS FOR YOU TO CONSIDER WHEN

BUYING OR ACQUIRING

A BUSINESS IN AUSTRALIA.

1. MAKING CAREFUL CONSIDERATIONS

• Before buying an existing business, you must weigh the pros and cons of doing so.

• A compelling reason for opting to buy an established business is the presence of a track record and a reputation.

• A good business history can increase the likelihood of a successful operation and ensure that finance is easier to obtain.

• There is less worry about “making yourself known” so finances can be saved. This means that although you have little room to personalise your business from the start, you will inherit, everything good (and potentially bad) about the business.

• If you do not already know the business beforehand, potential disadvantages can be the inflation of the goodwill element and a negative reputation inherited from the previous owner.

1. MAKING CAREFUL CONSIDERATIONS

2. ASKING THE RIGHT QUESTIONSWhen deciding to buy a business, start by asking what may seem obvious questions. Answers to these will help you decide about taking the plunge and about how to formulate your purchase agreement later on.

• Why and what are the reasons for the business

being sold?

• What is the history and reputation of the

business?

• What are the industry trends and patterns?

• Who are the customers?

• Who are the suppliers?

• Who are the competitors?

• What are the running operational costs and

overheads?

• Who are the employees, how many are there and

will they stay?

• What are the profits?

• What are the assets and liabilities?

Some typical questions include:

3. ACCOUNTING DUE DILIGENCE• An accounting due diligence is a

thorough check to evaluate the financial health of the target business.

• Get certified financial statements which are correct and properly represent the trading figures of the business.

• Figures provided under a disclaimer are a tell-tale sign that the seller or the accountant/auditor preparing them is either unwilling or unable to vouch for their accuracy.

Below are examples of what you will need to know about accounting due diligence: • A trading or profit and loss statement for the last two-three years;

• A balance sheet to identify assets and liabilities;

• A list of plant, equipment, fixtures and fittings, which the owner intends

to sell and a current valuation and proof of any applicable warranties or

guarantees; and

• Details of any stock sold with the business and how it will be counted

and valued at settlement.

4. LEGAL DUE DILIGENCE

Depending on the size and complexity of the business in question, a legal due diligence exercise often takes time and covers several areas and aspects of the way the business operates.

When conducted by lawyers, you will be able to understand issues such as the following:

• Ownership and shareholder issues;

• Interpretation of the various contracts which have been signed by the business, including contracts with suppliers, employees, loan documentation, asset ownership and title, leases and licenses negotiated and the existence of restraint clauses;

• Whether there are charges, encumbrances or liens on any property, assets or machinery;

• Intellectual property issues;

• Privacy obligations such as employee information, customer information, trading partners/business associates information and marketing files under the Privacy Act; and

• Litigation history to see who the company has sued or who has sued it.

5. TAX DUE DILIGENCE

• Understanding GST issues, stamp duty and corporation tax is vital. Your accountant will be able to advise you on the seller's financial statements, the market value of the business, GST, Capital Gains Tax and other tax issues.

• He/she may also advise on appropriate business structure options, and to assist with budgets, cashflow forecasts, and projected financial statements for you.

After having conducted the due diligence steps mentioned above, you will be able to enter into preliminary discussions about issues such as price negotiation, valuation techniques, obtaining any relevant government approvals, handling any licensing issues, identifying key value preservation issues like employee retention, transition planning and any other matters that will be documented in the contract documentation stage.

6. NEGOTIATION

7. CONTRACT DOCUMENTATION

Details relating to any transaction for the sale or purchase of a business should be documented identifying the subject of transaction, the consideration involved and the expected obligations of the parties.

Entering into a purchase agreement that addresses the following is therefore crucial:

• Identifying the assets to be acquired;

• Price and payment modes including payment stages;

• Conditions precedent to completion, e.g. third-party approvals, landlords' consents to assignment of leases and release of bank security over assets;

• Transferring employees;

• Assignment or novation of contracts of the business;

• Dealing with debtors and creditors of the business after completion;

• Arrangements for completion;

• Post-completion restrictions on the seller;

• Warranties and indemnities, providing for recourse by the buyer against the seller

• Limitations on the seller’s liability, including time limits for making claims and financial limits.

Your legal advisers will also be able to advice you on any ancillary documents needed to complete your purchase, such as:

• Assignments of goodwill and intellectual property rights;• Novation of key contracts;• New service contracts/employment agreements for employees;• Transfers of any freehold premises;• Assignments of any leasehold premises; and• Board and shareholder approvals (if necessary).

8. COMPLETION & BEYOND

• As a buyer, you become the beneficial owner of any individual asset of the target business only after all necessary formalities for completing the transfer of that asset have been complied with.

• Although many assets may transfer upon completion, you may need to take the risk that some may not transfer until sometime afterwards, or at all.

• The purchase agreement drafted by your legal adviser will be able identify those matters required to be dealt with or waived at completion, including payment of any part of the price then due.

Be aware that a number of matters also need to be attended to post-completion, including:

• The payment of any stamp duty, land tax or GST;• Formal assignments or novation of any contracts of the business not dealt with at

completion; and• Notices of change of ownership of the business to its customers, suppliers and to relevant

regulatory bodies.

8. COMPLETION & BEYOND

Whether you are a first time entrepreneur or an experienced buyer, each target business comes with its own unique circumstances and risks. At Owen Hodge

Lawyers, we are able to provide you with insightful legal tips and guide you at every step so that you can make an informed decision about your purchase.

Call us today at 1 800 770 780 or contact us via email at ohl@owenhodge.com.au to schedule a free consultation with our team of estate planning lawyers. We look

forward to assisting you.

http://www.owenhodge.com.au/