BUYING A BUSINESS
Thinking of buying a business? Have you been in business before? Have you worked in the type of business you are thinking of buying? What cash do you have available to enable you to buy the business? Do you own a house that has plenty of equity in it? Are you prepared to work the hours needed to run and build the business? Are you good at keeping up with accounts, GST and the like? These are all the sorts of questions (and more) you need to ask yourself before you seriously consider buying a business.
There are 2 ways to buy a business:
You can buy the shares in the company that operates the business; or
You can buy the assets of the business – its stock, its chattels, its goodwill, its lease.
Most advisers will tell you to keep away from option 1, buying the shares in the company that operates the business. This method brings with it inherent risks. You could find yourself personally liable if the GST has not been paid, if the tax has not been paid, if the bill for the photocopier is not up to date or if there are outstanding warranty issues, for example. It is on only in very limited circumstances when you buy the shares in a company. It follows that if you are contemplating buying a business, you should look at buying the stock, the chattels, the goodwill and take over the lease.
One of the first things you should do is talk to your accountant or find yourself an accountant who deals with the type of business you are looking at buying. He should be able to give you some idea of what a good price for the business should be. He will also talk to you about looking at the financial statements (accounts), the issues with buying the business and other related matters. After all, as part of your due diligence you will almost certainly be asking this accountant to review the books (financial statements) of the business.
Once you get a feel for the likely purchase price, you need to look at what cash you have available to buy the business. If you cannot pay for it from your own cash resources, you will probably want to talk to your bank in principle about buying the business and if the bank can lend you sufficient money to buy it and get it up and running. After all, the bank is usually the first port of call in this situation.
You need to be aware that if you borrow from your bank you will need good equity in your home. Why? Simply because the bank will want to take a mortgage over your house as security for the borrowing. There is another whole story to look at about asset protection once you know you can borrow from the bank to buy that business.
You can now get back to that agent to get an offer drawn up. It’s a bit like buying a house as you may go back and forwards in agreeing upon a price.
Some of the key elements in the agreement will be:
Purchase price.
Deposit – payable on agreement going unconditional.
Settlement date – leave plenty of time to get yourself organized.
Value of chattels, stock and goodwill breakdown.
Conditions to be inserted:
Due diligence – investigate the financial statements, the turnover and many other points. Leave plenty of time for this.
Landlord – lease approval. How long is the lease, what are its terms, when is the rent next reviewed, what are the outgoings over and above the bases rent, does it include a clause allowing rent relief in the event of another pandemic?
Finance – allow plenty of time to get finance arranged on terms suitable to you.
Every business will have its own subset of questions and issues that need to be investigated. There are many more points to consider for every individual business. These points are just a few of the key elements that need to be looked at if you are contemplating buying that dream business.