GENERAL ADVICE ON BUSINESS ACQUISITIONS
You will soon notice that accountants bankers and business brokers constantly refer to jargons and acronyms which describe phrases, features, taxes, issues, problem areas and assets of businesses.
Here are most of these often used but seldom explained terms with a run- down of what they mean to you as a business buyer.
GST: When buying a business, GST is not applicable to the purchase price as long as the business is a going concern.
DEBTORS: Sometimes it is tidier and advantageous to buy the debtors. This can help tie the debtors to the business giving the buyer a definite client base.
EQUIPMENT: Business sales usually include equipment sold in ‘as is’ condition. It is reasonable to audit equipment before settlement to ensure all is in place and working. This prevents ongoing issues after the transaction has been completed.
STOCK: The usual practice is to pay ‘landed invoice cost’ (wholesale price). You do not pay GST on stock as it has been paid by the Seller when bought. You do not have to pay for damaged or out-of-date stock.
FUTURE ADVERTISING: Discussion with the Seller is needed in regards to advertising contracts with time to run. Furthermore, the Seller may have reduced or cancelled advertising to save money. You need to ascertain what advertising / marketing has been done to generate revenue so you can at least maintain it.
WORK IN PROGRESS: The business may have orders in hand and unfinished work in progress at Settlement. A condition can be included that deals with this in the Business Contract. You need to discuss with us how you feel it should be dealt with. On the one hand it might be an extra expense, but on the other it could give early revenue after you’ve taken over.
WHAT IS NET PROFIT? In small and medium businesses, the net profit refers to the working proprietor’s profit. It assumes you as the owner will work in the business every day and the profit made is before tax, before loan repayments and assumes you will not also be paying yourself a weekly wage as your income is taken from the profits. Accountants often describe the small business owners profit as the PEBITA (proprietor’s earnings before interest, tax, depreciation and amortisation).
SECURITY OF TENURE: The value of a business is often linked to its right to occupy premises and in many cases (retail businesses) the location is critical. Generally, the longer the lease, the more valuable the business. Businesses with shorter leases or leases with demolition and relocation clauses require more scrutiny.
WORKING CAPITAL: In your first month of trading you may need funds to run the business while waiting for cash flow to kick in, especially if your new business extends credit to customers. This applies particularly to manufacturing, wholesale and service businesses. You need to allow for working capital requirements. Remember, working capital is the money tied up in the business that in effect generates the profits!
STAFF: When you take over the business you will enjoy the benefits and skills of the staff you inherit, but first be clear between yourself and the Seller who is responsible for the staff’s past, present and future workplace entitlements. Holiday pay, personal leave and long service leave need clarification. GMO can show you how the REIWA business contract addresses them and your solicitor should also be consulted.
CLIENTS AND SUPPLIERS: You need to understand where clients/customers come from and what terms and credit the business provides to them. It is also valuable to understand client demographics, purchasing patterns and preferences. Likewise, it is critical to understand where the business sources its products from and the terms its suppliers give.
INGOING FEES: The total cost of buying a business is not just the purchase price. GMO can explain to you about budgeting for State Government stamp duty on your purchase, loan application fees, lease assignment fees, accountancy due diligence, legal due diligence, licensing transfers and applications and your share of the stocktaking fee.
UNENCUMBERED PLANT AND EQUIPMENT: Usually when a business is purchased, the Buyer requires the Seller to remove any hire purchase or lease arrangements with suppliers or financiers. The Federal Government has recently established a Property Securities Register (PPSR) where third parties lodge their interest against business assets. The Buyer’s conveyancer should check the PPSR to ensure any third-party claims are removed prior to the business settlement. The Seller must pro-actively comply in having any encumbrances removed.