There is no doubt that the prospect of buying a business is an exciting opportunity. However, it is also an extremely big opportunity that can carry with it risks and consequences if not entered into with the right advice and information.

While nothing can substitute for professional one-on-one advice that is tailored for your individual situation, we thought we’d share with you just some of the key considerations when buying a business.

Which is the Best Entity to Make the Purchase?

Before entering into a contract to buy a business, it is very important to consider the entity or business structure that you wish to use to make the purchase.

There is not one best option for every business purchase. Rather, it is important to seek professional advice, from both lawyers, accountants and tax professionals, in order to consider all of the available options and determine which is best for your individual situation.

The most common entities that are used in the purchase of a business are:

  • sole proprietor;
  • partnership;
  • a company; or
  • a trust.

 The entity type that you choose is particularly important if you are entering into the business arrangements with business partners or other parties – whether as joint venturers, financial supporters or as equal participants.

Each entity type has its own pros and cons when it comes to establishment and ongoing costs and benefits. This may mean that whilst one entity can provide flexibility when it comes to distribution of profits, ongoing costs or difficulty in sourcing funding for operational purposes maybe greater in a different entity structure.

Further consideration should be made as to the financial risks that you are prepared to take if you do not have sufficient funds to finance the purchase or establish the business and the ongoing operation of the business. Some entity structures limit the method and manner of borrowing and whilst you may have siloed the business from your personal affairs, you will be required to provide personal guarantees to support borrowing for the business.

For many reasons it is important to take the time, and get the right advice, to ensure that you make the right decision when it comes to selecting the purchasing entity type. In particular, if there is a need to change the purchasing entity once the business is purchased (either after entering into the contract or after settlement), there may be significant costs involved in doing so, including significant stamp duty consequences.

What Are You Buying – Business Assets or Ownership Interest?

Unlike buying a property, where it is usually pretty clear as to what is for sale/to be purchased, buying a business can occur in a number of different ways.

The entity could be bought through acquiring the assets of the business whether part or all of the assets or acquiring part or all of the ownership interests (i.e. units or shares) in the company or trust operating the business.  In some instances the business is operated by one entity and the business premises is operated by another entity and consideration should be made as to whether it is better to keep the business and property separate or to combine together.

In addition to the considerations and implications of purchasing with the various entity options as outlined above, there are considerations and differences to be aware of whether you are purchasing the business assets or the ownership interests.

Business Assets

  • apportion the purchase price between different classes of assets – allows you to claim a deduction for revenue assets (eg, trading stock)
  • Stamp duty rates are generally higher when you purchase the business assets compared to buying the units or shares in the entity.
  • Goods and Services Tax (GST) will apply to the acquisition of the business assets if the purchasing entity is registered for GST (or required to be registered), unless the sale of a business is a going concern.

Ownership Interest (Units or Shares)

  • total purchase price is included in the cost base for the units or shares acquired and is used to calculate any capital gain or loss when the asset is later disposed of
  • may allow you to utilise any losses or franking credits
  • may be liable for any tax debts of the acquired entity
  • the sale of units or shares is treated as an input taxed supply, meaning you will not be able to claim input tax credits on expenses incurred (eg. due diligence audit fees)

The due diligence process can also help to decide whether it may be a better option for you to buy the business assets, or the units or shares, if the vendor is willing to consider selling either way.

Due Diligence

In order to make a well informed decision as to whether a business is profitable and suitable to purchase you should undertake a thorough pre-purchase investigation of the business. This is known as due diligence.

Due diligence is essentially a forensic process of carefully reviewing all of the financial records, as well as other business related documents, for business that you are interested in purchasing.

During the review process, investigations are conducted, and steps are taken, to ensure that the vendor’s representations are correct. In addition to the financial records, this can include looking at details such as:

  • company property;
  • leases and licenses;
  • client and supplier contracts and the terms of trade;
  • intellectual property including domain name and website and proprietary products or processes;
  • employees and employee entitlements;
  • Personal Property Securities Act charges and entries;
  • liabilities of the company;
  • plant, machinery and motor vehicles.

Of course, a lot of those records are considered sensitive or confidential and so in order for you as a potential buyer (and your advisors) to gain access to those records you will usually be required to sign a confidentiality agreement, also known as a non disclosure agreement. This is your promise that you will use the materials solely for the purpose of the due diligence assessment and not misuse or disclose anything that is discovered during the process to any other parties.

It is often the case that while the due diligence is being undertaken, an exclusivity agreement is also entered into between the parties. This gives the potential purchaser the full and unfettered exclusive right to purchase the business should its due diligence investigations prove acceptable.

Sometimes a contract may be entered into with an agreed period of time which enables the purchaser time to undertake its due diligence, and if the findings of the due diligence does not reflect the vendor’s warranties or identifies an unacceptable risk, then the purchaser has a right to rescind the contract.

In other contracts, the parties will agree to a set of conditions that must be satisfied before the sale and purchase can be settled, and if those conditions precedent cannot be satisfied, the contract can be terminated by either side.

Whether the due diligence investigation is undertaken before or after entering into the sale and purchase contract is a matter that is dependent on the type of business. In certain circumstances the ultimate sale price is based on a certain return or profits in the business.

The due diligence, performed by the purchaser’s accountants and lawyers, essentially confirms the business’ viability as well as verifying exactly which assets and/or ownership interest are being included in the sale of business offer.

Undertaking a rigorous due diligence process can also greatly assist in understanding the true value of the business. Often, what the vendor is asking as a purchase price may not accurately reflect what the business is actually worth. As such, findings of the due diligence may also give you some leverage to negotiate the sale/purchase price.

It is only after extensive due diligence has been completed that a potential purchaser of a business should then make an informed decision as to whether to proceed with, or terminate, the purchase process.

Get Expert Advice to Buy a Business

At The Quinn Group, our highly qualified teams of legal, accounting and taxation professionals work together to ensure that you can make a well informed decision when it comes to purchasing a business. We provide expert advice covering all of the important considerations when looking at buying a business from business and tax advice to carrying out the due diligence process. And if after that you make the decision to proceed with the purchase, we can take care of that too.

Call us on (02) 9223 9166 or submit an online enquiry to schedule an appointment and discuss your individual situation.