Issues you need to be aware of When Buying a Business
When considering the purchase of an existing business there is a list of basic enquiries you should make as part of your due diligence enquiries
Once you have indicated your interest in the business, you’ll need to sign a Confidentiality Agreement in order to obtain the initial information package provided by the vendor. This package should provide you with enough information to make an offer on the business which will allow you to engage in a detailed due diligence process. There are no secrets in the due diligence process. Most of it is common sense based on the idea that before you buy a business, you need to know what you’re getting into. For example:
WHY IS THE BUSINESS FOR SALE?
Is the business’s product or service coming to the end of its cycle? Has the business’s competition reduced its ability to maintain profitability? Is the owner retiring, or are there personal issues that are forcing them to sell?
Is the lease about to expire and the owner doesn’t want to carry on? Is there an opportunity to capitalise on the owner’s reasons for selling and give the business a new injection of life and enthusiasm. Is there scope for improvement?
DETERMINE THE STATE OF THE BUSINESS FINANCES
It’s imperative that you learn everything you can about the financial condition of the business. Make sure you and your financial advisors review the current financial statements, balance sheet, profit and loss statements, GST and tax returns for the previous 3 years. Also ensure you review the current bank statements and the current accounts payable and receivable, to understand the state of the business’s cash flow.
Have the owners kept complete and comprehensive financial records? Always make sure you understand the relationship between income (sales) and expenses.
- What are the monthly and annual sales pattern? Is it consistent? Seasonal? Related to other cycles?
- Are sales fluctuations due to particular promotional campaigns?
- Are reported sales consistent with industry norms?
- Can sales increase with current resources?
- Is there a salesperson who contributes significantly to success? Can you keep him/her?
- Is the seller’s personal role critical to success?
- Are the total sales broken down by product line if applicable?
- Will existing suppliers still support you as a new owner?
- Are there advances or prepayments that should be deducted from the purchase price?
- Are bad debts deducted from the accounts or are they still shown as receivables?
- What’s the future of the product or service? Is it growing, stabilising or slowing.
- Will an increase in sales have a corresponding increase in expenses?
- Are the expenses consistent with industry norms?
- Have any expenses been deferred (e.g., equipment maintenance)?
- Will any annual expenses be due soon?
- What new or increased expenses should you anticipate?
- Are staff salaries due for a review?
- Are owner’s wages contained in the overall wages expense?
- Are all interest payments directly related to business debts?
- Does the depreciation expense reflect the true value of the assets?
- Are there any prepaid expenses that will need to be reimbursed?
INSPECT THE CONDITION AND OWNERSHIP OF THE PHYSICAL AND FINANCIAL ASSETS
The business purchase will often include physical assets such as plant, equipment and inventory. What are the book value, market value, replacement value of the fixed assets? Make sure the equipment is in good working order. If you’re new to the industry, engage an industry expert to provide a knowledgeable and experienced opinion for you. Is equipment in good repair, operating efficiently, current, easily serviced, and saleable?
Businesses often raise debt against physical assets so you’ll also need to understand the security provided for any business debt. Make sure you understand who the creditors are that have a security interest on any business assets. Is there a GSA (General Security Agreement) that will allow them to seize and sell the secured assets, even if you’re the current owner? If any plant or machinery including vehicles is being leased, ensure that the lease can be assigned to a new owner, or that the lessors or financiers are prepared to transfer the ownership.
Always review the current marketability of the business inventory. Make sure you’re not paying valuable money for dead or obsolete stock that you’ll have to discount heavily to turn back into cash. Also check if any inventory that’s been sold and not shipped and make the appropriate adjustments to stock. Are you buying accounts receivable as an asset? Do you have details on the payment history of the account holders? What is the risk that the aged debtors could become bad debts? Could you sell the accounts receivable to a factoring agency (bank or finance company) and turn them into cash?
ENSURE THERE IS ONGOING SECURITY IN THE LEASE
Most businesses lease the premises from which they operate. Make sure you get a full copy of the lease and review it carefully. What is the term of the lease? How many Rights of Renewal are there? Are the current terms of the lease sustainable for the business? Is there
Buy a Business in the ACT with a $200,000 Turnover
The small business owner scheme has made it easier for people to buy a business and continue on the path of migration. You must be living in the ACT for the last 3 months before being eligible and be committed to staying in the ACT for at least 2 years from the date the visa is granted.
To be part of the Small Business Owner pathway of the 491 Visa in the ACT, you must demonstrate the following:
Own at least 51% of an eligible registered business located in the ACT
Your business must have a minimum turnover of AUD $200,000 per annum (or pro-rata).
The business must have actively traded in Canberra for at least 6 months from the date established or purchased.
Your business must be profitable
Your business must be paying you the following salary:
190 nomination: at least $26,000 for six months.
491 nomination: at least $13,000 for three months.
You must employ at least one Australian citizen, permanent resident or New Zealand citizen for at least 13 weeks (minimum 20 hrs pw).
You must be able to claim Canberra Matrix points in the Small Business Owner Category.
Your spouse or partner must be a resident in Canberra for the last 3 months, or living overseas
When buying a business it’s important you are aware of the criteria and options – you don’t want to purchase a business only to find out you’re not eligible for the Small Business Owner (SBO) scheme. The following businesses are not eligible: sub-tenancy, ride-share, taxi, delivery, courier services or an on-sold business previously used to qualify for ACT nomination.