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Legal Have you consulted a legal representative regarding the terms and conditions of any applicable lease agreement and your obligations and rights under such agreements? Does your solicitor's search reveal that no notices in regard to health, water and sewerage or other government requirements have been served on the business that require work to be carried out? Do you understand your obligations under the intended business legal structure? Are there any legal proceedings pending against the business or the seller? Have you sought legal and accounting advice on the best way to handle your finances, the purchase and your business structure? Tax You're buying an asset. At some point in the future you may wish to sell it. Are you aware of the relevant provisions of capital gains tax law? There are special capital gains tax implications if you sell a business within 12 months of purchase. If this is your plan, have you considered these? There may be stamp duty implications if there's any internal trading entity restructuring (e.g. family partnership to company). Have you considered these? Are there any GST or other tax implications for your purchase? Have you consulted an accountant on how to value the various assets for the best tax advantage? Purchase agreement Does the draft contract identify specifically the assets you're purchasing, the liabilities you're assuming and the precise date and time when you'd take over the business? In drafting your offer, have you included escape clauses covering finance, record inspections, obtaining necessary licences and rights, other transfers, and achievement of minimum trading levels during the trial period? Have you arranged for total control over the recording of cash sales and banking for the trial period? Is the business being sold as a going concern or will the current business be wound up? Legal advice is usually necessary on this. If buying part of a company or entering a partnership, do you know of any limits on one person making a commitment on behalf of the business? Price Were there other prospective purchasers who decided not to buy? What were their reasons? Are you relying on the seller's accountant's valuation of the business? An independent valuation of the business may be more appropriate. Are you ready to negotiate? A business is worth no more than the highest price the market will pay.
Buying a business - Due Diligence When buying a business due diligence is extremely important. The process of due diligence officially begins once heads of terms have been agreed and issued. Most experienced buyers will however have performed their due diligence procedures by themselves at this stage. This period is used by the buyer to validate all information which has been supplied by the seller. If you are buying a business for the first time you should involve all of your professional advisors during the process. Do not let the fees of accountants and solicitors put you off, the money that you spend with them now could save you from losing a lot more in the future. Make sure that you have studied all of the relevant documents yourself, make a list of anything that you are unsure about and raise these points when meeting with your advisors. As the buyer, due diligence is your opportunity to check through everything, make the most of this time and ensure that everything stacks up. If you have any reservations or if you unsure about anything you should speak up and make sure that you get some answers. This period is the last step before you sign on the dotted line and there will be no going back! Whilst this is probably not the most exciting part of buying a business it is probably one of the most important, take your time. Listed below are some of the points to consider during due diligence when buying a business. Financial statements and tax returns Although you will have probably been supplied with some financial information about the business that you are buying it is important to go through it again with your accountant, make sure that you have not missed anything. Try to use an accountant that you either know from previous dealings, or find one who has some experience with business acquisitions, preferably in the same industry as the business that you are considering. Employee records Check through all of the relevant paperwork which has been supplied relating to any staff that will be staying on. Check how long those staff have been employed and what rights they have. When buying a business that involves the transfer of staff rights you cannot be too careful. Licenses If the business requires specific permission or licenses to carry out any part of its procedures make sure that they are all current and in order. This is also a good opportunity to check the annual fees associated with these licenses. It may also be worth contacting the relevant organization to make sure that there will not be any potential problems with the transfer of the license into your name. Equipment, plant, fixtures, fittings You should have been supplied with an inventory of all equipment, fixtures, and fittings that are included in the sale. At this time you should check firstly that all of the equipment that is needed to run the business is included. Once you are satisfied that this is in order you should check the condition and recent service records, is there anything that is likely to cause you problems. When buying a business that relies heavily on a small number of key pieces of equipment you must tread carefully. You should feel quite within your rights to ask for you engineer to be allowed access to inspect the equipment and provide you with an impartial report. If the seller has a problem with you doing this you need to ask yourself why. Lease details The lease is probably one of the most important documents involved in the transfer of the business. When considering taking on an existing lease, or when negotiating a new lease always consult you solicitor. Leases are nearly always written using a lot of legal jargon, it is easy to miss something or to misinterpret the meaning of certain points. You should however try to read through it yourself, it has been known for solicitors to miss things too. Make a note of any areas that you do not understand and ask your solicitor to explain them to you. Some of the main points that you will be looking for are: Length of term – How long is remaining on the lease and what happens at the end of that period? Amount of rent – How much and when is the rent due? when will it rise and how will the increases be calculated?
Financial records Have you analysed the financial records for the past 3 years, including balance sheets, profit and loss statements, tax returns, purchases and sales records and bank statements? Have the records been well kept? Do they show potential for growth? What do the profitability and liquidity ratios show? Based on past financial results, have you projected the future cash flow and profitability of the business? What is the break-even point? Accounts receivable Are you buying the accounts receivable? Do you have an aged listing of accounts receivable? Have you made adequate provision for doubtful debts? Has the previous owner received any payments in advance (e.g. deposits) that they should turn over to you? Will you have to build up your own accounts receivable? Have you worked out how this will affect your cash flow? Could you sell the accounts receivable to a factoring agency (bank or finance company) in order to generate cash flow into the business? What would be the implications of such a move? Sales patterns and records Are sales records reliable? Are the total sales broken down by product line? Are bad debts deducted from sales, or are they still shown as receivables? Is the percentage of bad debts within industry standards? What are the sales patterns year-by-year and month-by-month? Is the pattern seasonal or related to some business cycle (e.g. home construction or other uncontrollable variable)? Are there fluctuations in sales due to one-off sales? Are you sure all sales figures shown are for this business, and that the seller hasn't added sales from another business? General sales information Is the product or service likely to maintain or improve its marketability or is it in danger of becoming over-sold, out of style or obsolete? Can you increase sales with current resources? What is the sales mix (the ratio of each product sold to total sales)? Can you achieve the required sales targets? Do you know the minimum likely sales and the maximum likely sales? Is a particular salesperson critical to success? If so, will you be able to retain that person in your employment? Do a small percentage of clients represent a large percentage of sales? Is the seller continuing on with another business that may have some effect on the future sales of this business? What is unique about the business's product or service? Profits Have you looked at the effect of increased or decreased sales on profit? Have you considered the effect of inflation on sales and costs in the years to come? Are profits adequate to warrant the risk of buying? Warranties and refunds Are any goods on warranty? If so, should you make a financial allowance for possible warranty commitments? Will clients expect you to make refunds or warranties even in instances when you're not legally obliged to do so?
The business Is the type and size of business compatible with your interests, experience, personality and capital? Is the business part of a group or franchise that may restrict how it operates? Does the place of business have all the required permissions to perform the business functions it does? Town planning laws and workplace health and safety regulations are particularly important here. Are there any procedure manuals or quality assurance programs in place? Do you need new licences? Licences may include licences for equipment and user licences. The seller Do you know the real reason why the business is for sale? Is the seller being cooperative and supplying all relevant information? Is the seller willing to sign an agreement to refrain from competing against you (i.e. restrictive covenant)? Legal advice is usually necessary here. Will the seller train and help you after you buy? If so, for how long? Is the seller's personal role critical to success? Do you have similar skills, experience and personality to the seller if it is their role you'll be replacing? Would there be an opportunity to work in the business for a trial period before entering into a contract? Is the personality of the seller a factor critical to the business's success to date? What role does the seller play in the day-to-day running of the business and would they be missed? Competition Are prices competitive for the nature of the business? Are competitors gaining strength? Will the internet mean price-based competition from countries with lower costs? Industry Is the industry in which the business operates expanding, contracting or remaining static? Is any deregulation likely to occur in this industry that may open the business to greater competition than it experiences now? How does the business rank against other businesses in the same sector? Suppliers Will you be able to continue buying the products from existing suppliers? Have any suppliers been offering special conditions to the seller based on unwritten agreements? Have you checked the business's credit rating with suppliers? Will you receive an established rating or be treated as a new account? Location Is the business in a good location or is this the reason why it is for sale? Are new developments going to be commenced or opened in a nearby location that could affect your trade? Are there any impending town planning changes that may affect the business? Are major road developments or public works going to proceed in the near future that may affect your business? Has a rezoning application been lodged in regard to either the intended business location or nearby locations? Lease Is there a rental lease in place? Can you continue under the current lease or do you need to establish a new one? Have you checked the terms and conditions of any lease of premises and discussed these with your solicitor? Has the landlord changed recently? This could indicate matters such as an impending increase in lease payments or possible redevelopment proposals. Staff Are there any contracts in place with staff? Are remuneration packages for staff clearly defined? Are staff adequately paid, or do they expect wage increases soon? Are staff paid according to award conditions? Which party is responsible for previously accrued entitlements to long service leave, holiday pay, sick leave, superannuation and other employee benefits? Has workers' compensation insurance been paid in respect of all employees? Do current staff require any licences? SmartLicence is the Queensland Government's information service for obtaining business licence applications, lodgement and payment. Is it possible to talk to staff privately before sale? Is an adequate salary allowed for work done by the owner and their family in addition to an adequate profit margin?
Expenses and debts In this guide: Due diligence checklist for buying a business Legal and tax Finances and sales Business operations and industry Business assets Expenses and debts Print entire guide Due diligence for buying a business involves a detailed review of the business's costs and liabilities. If you don't comprehensively understand the business's debts and ongoing costs, you may be taking more risk than necessary. The due diligence process makes sure you are getting the most for your money - without receiving any surprises after you complete the purchase. It is a good idea to consult a professional adviser to help answer the following questions. Expenses Are all expenses shown? Will you, as the new owner, have the same level of expenses? Is there a chance the owner has paid expenses through another business? Has the owner avoided some expenses that could be delayed, such as equipment maintenance? Will you pay for poorly maintained plant later? Are there any annual expenses due soon? Are there new or increased expenses you should anticipate? What maintenance agreements are in place and what do they cover? Are they paid to the current date? What expenses do similar businesses have? Are some expenses prepaid by the seller? Will you have to reimburse the seller for your share? Are you responsible for any corporate body expenses related to the business? What effect would decreased or increased sales have on your costs? Do you know what costs are allocated to which product, and how a change in product mix would affect costs? Are there any ongoing advertising arrangements that you need to honour? Debts Are the assets you're buying free of debts and liens? If you're taking over debts, what are the terms of repayment? Are there any contingencies such as warranties, court actions or guaranteed debts or accounts? Are you assuming any risk of being liable for the previous owner's actions (as might happen when buying a limited company)? Will your cash flow from operations be enough to pay your debts? Is interest paid for money loaned to the business?
Assets Do you know exactly what you are buying and not buying? Are there lists and have you checked them? If the business is a limited company, are you buying the shares or the assets? Legal advice is probably necessary if you're buying a company. What is the book value, the market value and replacement value of the fixed assets? Which will you pay? If you're going to buy inventory or work-in-progress, has a value been agreed on? Have you agreed on how it will be adjusted at the time of settlement, and within what limits? Have you decided what intangibles you want such as mailing lists, business name, exclusive rights, or leases? Can they be transferred? Stock Are you sure that the rate of stock turnover is in line with industry practice? Are you sure that the existing stock does not include slowly moving items from another business? Has inventory been correctly valued in cost of goods sold statements? Has an item of inventory been sold but not shipped? Equipment Is the equipment in good repair? Is it efficient? Is it in danger of becoming obsolete or difficult to service? Are parts available? Could it be sold easily? Is depreciation claimed for the equipment and, if so, is it reasonable (particularly for the price you'll be paying)? Is it based on an accounting or tax viewpoint? Is any equipment leased? Do you know the terms and the cost of all equipment leases? Will you get ownership when equipment leases expire? What are residual values?
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