Your common accounting questions: buying a business

1st January, 2015

Buying a business

There are many reasons that drive people to consider buying a business. Maybe they have been made redundant from their employment and they need to “buy a job.” Maybe they discovered an opportunity they can take advantage of being in the right place at the right time, or they want to expand their business quickly.

Here are my top three tips to guide you through the decision making process:

 1. Due diligence is a must before any offer is made

Due diligence consists of conducting a detailed review of all aspects of the business you are looking to buy, particularly in relation to its strengths and weakness, whether they exist now or could arise later.

READ: 10 warning signs to look for when buying a business

What are the items to look at?

  • Review a brief description of the business activities and the reason for the sale.
  • Analyse the trading history. I recommend at least four to five years of past financials that have been prepared by an accountant, plus the current financials and forecast.
  • Explore market risks including business reputation, competition, industry health, occupation safety and government policy risks.
  • Identify the inventory and equipment that are critical to business operation, and assess the current value. This will assist in working out whether or not the asking price is fair and reasonable.
  • Examine staffing requirements. Do you need all the staff? Who are the key staff members and do they possess the skills you require in the business? You will need to issue new employment contracts to any staff you wish to employ with the purchase of the new business.

     Tip: Check and see if any annual leave and long service leave is due and payable for existing staff.

  • Ask about existing leases for the business premises and any other contracts that might be in place with the current business owner.

     Tip: You will need to negotiate with the landlord and current suppliers yourself and have these relationships secured before you finalise the purchase.

  • Transfer business name/(s). This will need to be transferred to your business entity as part of the purchase.
  • Resolve any outstanding legal issues.
  • Understand the sales channels and distribution. Ask for an overall picture of the selling process.
  • Study the logistics. What are the current distribution, transport or warehouse costs? Are there any contracts associated with this?

2. Consider the legal structure of the new business

  • Will you operate as a sole trader, partnership, company or trust? It can take time to set up the structure, be aware of this time impact when going forward with the purchase.
  • Be sure to consider taxation and other business registrations including GST, employment and wage forms.  These registrations can also affect timing.
  • Register the business name.
  • Review insurances including public liability, building, loss of profits, product liability and workers compensation.

READ: Protecting intellectual property when buying or selling a business

3. Be prepared to implement a good accounting system

The most successful businesses have a great accounting system that can deal with not only sales and expenses, but also payroll and inventory. Decide what you are going to use beforehand. Keep track of all your financial information. It will be invaluable for assisting future decisions.

  • Set up your invoices. Do you have a logo for your business that you can put on invoices and receipts?
  • Compile a list of inventory items and record it in your system.
  • Is your website ready, and if your business sells over the internet, have you set up payment systems?
  • Manage your cash flow. Do you need overdraft protection?
  • Prepare budgets and forecasts to stay on track.

The above is a general guide. There are more items that need to be considered. Start with these recommendations, and you will be in the right mindset for buying a business.

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