Many people spend their nest egg on buying a business. Before you sign a contract to purchase a business you should consider the following:-
- Which entity is buying the business? If a company then the company will have additional costs associated with taxation and company returns. From an asset protection aspect, it may be preferable to have the business in the name of a company if assets such as the family home are owned in individual names. That protects the family home from attack if the company which owns the business is sued. If however the company enters into an agreement which requires a personal guarantee, then the assets (in this case family home) can potentially still be attacked in the event that the guarantor and/or company is sued successfully,
- A trend in contracts is that the purchase price breakdown attributable to goodwill, assets, work in progress is not stated in the contract. If you are presented with a contract which does not contain a breakdown of the purchase price, you may wish to obtain financial advice prior to signing the contract. The purchase price breakdown may have taxation consequences,
- If you are unfamiliar with the type of business that you are considering buying then a period of tuition before and after the changeover date of the business will assist you in familiarizing yourself with customers, suppliers, stock control and all the other daily rituals associated with the business. A period of tuition is invaluable,
- From a financial aspect you need to know that the business you are buying is at a realistic price. The standard business contract provides for you to nominate a trial period and specify the turnover that you require the business to bring in. If you are not satisfied with the turnover in the trial period you will have the option to terminate the contract,
- You need to carefully consider a trading restriction on the Seller after the business has changed hands. The restriction should take into account the number of like businesses in the area and be reasonable from both a time and area aspect,
- If the business requires Council approval to operate, for example, as food premises you should consider conducting a Council search to check that the premises meet Council standards (e.g. the number of hand basins or that fridges/freezers are on rollers to facilitate cleaning). Such a search may delay changeover but could be money well saved if the Council does a random inspection at a later date,
- The standard contract conditions state that if the business is being sold as a going concern that the Buyer is to provide evidence of GST registration to the Seller prior to the changeover date,
- The standard conditions to the business contract contain a warranty from the Seller that plant and equipment will at changeover will be in good working order and condition. As a Buyer you should check that that is the case before parting with your money,
- Many businesses operate from leased premises. If the business you are buying operates from leased premises you should consider whether you require a new lease or to take over the existing lease. As a Buyer you should consider the term of the lease. If you sell the business at a later date the business will be more attractive to a Buyer if the premises have a longer unexpired lease term.
This is a general overview only. Please contact our office for more detailed information.