Buying a Business, Buy a Company, Buy a Franchise and New Business Ideas
Softhard Solutions ShopMate Business Accounting Software for Businesses
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You've decided to Buy a Business, Buy a Company or Buy a Franchise,
to go into a new business by buying an already established business,
completed your market research, and may be, written your business plan.
There are many advantages to Buying a Business, but equally many disadvantages. If you thoroughly check the operations of the business and ensure the purchase agreement contains safeguard clauses, many of the disadvantages can be minimized. Now you're ready to take the next step, but where do you begin?
Usually, a Business Accounting Software of some kind may come with the business you may buy as part of your Buying a Business but is it performing well? When you are ready with your business, you will need a good Business Accounting Software, you can get that here on our website, our ShopMate Business Accounting Software just may do the job for your business.
You may also brush up and read on Accountancy Theories...
There are many advantages to Buying a Business, but equally many disadvantages.
If you thoroughly check all the operations of the existing business and ensure
the purchase agreement contains safeguard clauses, many of the disadvantages can
be minimized. Take your time investigating, do not be pushed into a 'Quick Sale'
by the owner of the business.
With an existing business there will always be surprises. You may never know the real reason why the business is up for sale, but you can reduce the potential for surprises by insisting on working in the business for a time prior to sale to see how staff and clients really view the new business.
When prospective customers had a business or had it on their mind, traditionally, Softhard Solutions was able to provide them with business accounting software (often also hardware) to run their business the way they do the business.
There were, at many times, Softhard Solutions' customers who did not quite have a clear picture of the new or established business they wanted to do or undertake. This page and following pages are dedicated to such people. Its all tips and 'need to know' about how to Buy a Business and what to do before a beginning.
Advantages of Buying a Business
If you buy a business you start with:
- An existing customer base and existing contracts.
- An existing supplier base and agreements.
- An existing staff base and management.
- Existing plant, equipment, stock and material.
- Knowledge of the business from the current owner.
- Premises that are set up.
- Goodwill associated with the name and location of the new business.
- Financiers lending more readily to an existing business with a trading record.
Disadvantages of Buying a Business
The disadvantages of buying an existing business can include:
- Customers may link the goodwill to the previous owner and leave when a new operator
takes over the business.
- Staffing problems:
- Some staff may leave when the new owner takes over.
- Some staff may be unsuitable for the job they are doing.
- Some staff may resent the change to a new owner.
- You may inherit staff entitlements, such as impending long-service leave payments.
- Some staff may leave when the new owner takes over.
- Plant and equipment may be obsolete or faulty.
- The business may have no real intellectual property that is transferable.
- The business may have a bad image which is difficult to change.
- The cost of acquiring goodwill may be too high.
- Financiers lend less readily to an existing business with a bad trading record.
Checklist for Buying a Business
The level of co-operation you receive from the current business owner is one indicator of whether you should go ahead or not.
Your checklist of the existing business can include:
- Find out why the new business is for sale.
- Decide whether the type and size of the new business fits with your needs,
skills and experience, financial capacity and future plans.
- Check the operations of the new business, including sales, costs, profits
and assets. It is advisable to take independent financial advice from your accountant
when reviewing the financial records of the new business being considered.
- Investigate the WorkCover claim record of the new business.
- Research current and potential competitors. It may be prudent to consider placing
restrictions in the sale contract on the future trading activities of the vendor
where this is in direct competition with the new business you are intending
- Inspect contracts for current and future work with customers.
- Review the draft purchase agreement with your solicitor and advise them to carry out all required searches.
Checking the Operations of the New Business
Your checklist of Sales of the existing business can include:
- Check monthly and yearly sales patterns.
- Compare sales trends with industry trends.
- Determine if the business is expanding, losing sales or remaining static.
- Value existing stock - ensure that it is not old or unsaleable and that there is
- Identify the business customer base and percentage of sales from different customers.
Check to see if the customers will stay with the business if you purchase it.
- Determine where each of the business products is on their respective life cycles.
- Determine whether you'll be able to increase sales with current resources.
- Find out if you are able to continue to buy from existing suppliers.
- Find out if there are any local developments that may affect trade.
Your checklist of Costs of the existing business can include:
- Identify all fixed and variable costs and include interest expenses on your borrowings
for the business.
- Examine the costs recorded for the business and ensure costs are reasonable.
- Determine whether recorded depreciation costs are reasonable.
- Determine whether you will incur similar costs to the current business owner.
Your checklist of Profits of the existing business can include:
- Analyze financial records, including balance sheets, profit and loss statements,
Business Activity Statements and sales records.
- Determine whether the business generates sufficient profit for a reasonable income.
- Look at effects of increased or decreased sales on your profit.
- Compare gross profits with industry trends.
Your checklist of Assets of the existing business can include:
- Identify all asset items that you are buying. Refer to an asset register/list,
- Check depreciation schedule for equipment, fixtures, fittings, etc.
- Determine book value, market value and replacement value of fixed assets.
- Identify any current leases for fixed assets.
- Ensure equipment is in good working condition.
- Determine if any equipment is unnecessary for the business or obsolete.
Your checklist of Staff of the existing business can include:
- Determine whether existing staff will continue employment.
- Identify key staff and review salaries, employment packages and FBT implications.
- Assess any outstanding holiday pay and/or long-service leave liabilities.
Sale of Business and the GST or VAT
The supply of a business as a going concern is GST free if the following requirements are met:
- The purchaser and the vendor must both be registered for GST.
- The business is actually for sale with money changing hands.
- The vendor must carry on the business until the day of sale.
- All things required for continued operation of the business must be supplied.
- Both parties must agree in writing that the business is a going concern.
The Purchase Agreement
Decide whether, on the basis of the due diligence conducted and the risks involved, you are comfortable with the purchase price.
Closely review the draft purchase agreement, as well as all the clauses in the agreement.
Ensure the purchase agreement:
- Details all assets and liabilities to be assumed.
- States when the business is to be taken over.
- States whether the offer is conditional on:
- obtaining finance
- inspecting all records
- receiving necessary licences and rights
- minimum trading levels being met during a trial period.
- obtaining finance
Some tips on how to avoid business failure:
- Don't underestimate the capital you need to start up the business.
- Understand and keep control of your finances - income earned is not the same as
cash in hand.
- More volume does not automatically mean more profit - you need to get your pricing
- Make sure you have good software for your business, software that provides you with a good reporting picture of all aspects of your business operations.
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