As a purchaser of a business, you should conduct an initial assessment of the business to satisfy yourself that it is a viable purchase. This typically involves an evaluation of the sales, profits, assets, financial records, overheads, salary for the owner, stock availability and key personnel. If required, we can recommend suitably trained people who can assist you with this assessment.
2 – Arrange Your Finance
You need to ensure that you have sufficient funds to fund the purchase. You will need to factor in Stamp Duty and unless you are purchasing a “going concern” business, GST. If you need to borrow funds, your lender will generally require security for the loan including a Mortgage, Personal Property Security Registration and Personal Guarantees by Directors of the purchaser if the purchaser is a company. You should ensure that you are well informed about the terms of any Loan and the obligations that you are taking on.
3 – Decide Your Purchasing Entity
A prudent purchaser will have regard for risk (e.g. exposure of your assets to liability) and taxation minimisation when deciding on the appropriate entity to use to purchase the business. The usual options include sole trader, partnership, company, or trust, or a combination of one or more of these business structures. When considering your options, we recommend you start with the best option from a risk management perspective. Your accountant should then assess its effectiveness from a tax minimisation perspective… and adjustments to the business structure can be made as required.
4 – Review the Contract
Before signing the purchase Contract, you should understand what it is the Vendor is selling so that you can assess whether it complies with your understanding of what you are buying. If you require additional terms to be inserted into the Contract, or terms that are in the Contract to be deleted or amended, the time to attend to same is BEFORE you sign the Contract. After the exchange of the signed Contracts between the parties, both parties will be committed to the sale and will need to complete all of the things necessary to perform their respective obligations under the Contract by the designated completion date.
5 – Assess the Need for a Legal Due Diligence Either Pre or Post Exchange
Due diligence is the process by which the prospective purchaser of a business investigates what is being bought to make sure that it is what the seller has represented it to be.
During a due diligence is when you want to uncover any “skeletons in the closet”, not after purchase completion.
A due diligence may take place before or after exchange of contracts. You may choose to undertake the due diligence after exchange of contracts if you are concerned about locking the seller into a sale. Due diligence that takes place between exchange and completion is a more traditional approach however, if time permits, a pre-exchange legal due diligence is the preferred option, because you are not bound by a contract.
The extent of legal due diligence is generally governed by three factors: your understanding of the business to be purchased, the time available to conduct the due diligence and, your budget for the due diligence.
6 – After Completion
After completion there will still be a few things that must be attended to. This may include: