It is not unusual in a business’ lifecycle to be presented with an opportunity to acquire another business. For some SME business owners, buying another business seems like a logical and effective way to encourage expansion and growth. However, before committing it is important that you speak to your trusted advisor and ensure you’re not taking a gamble and have every confidence in the strategic move.
We have put together 5 fundamental things to consider before committing to buying a business.
1. Research
Conducting thorough research and due diligence is the first and most important step to undertake before considering buying a business. It will save you time and money in the long run as it will bring to light any financial or structural problems that are not so obvious at face value. This process will also help you ascertain the true value of the business to ensure you are paying a fair price. As part of this process you should be examining the following:
- Corporate structure of seller
- Financial records
- Employment contracts
- Tax compliance history
- Current contracts with both customers and suppliers
- Employee records
- Intellectual property
- Legal compliance
- Business assets
- Company records
- Insurance claims history
The business owner should be more than happy to disclose this information and records for your review. It is also worth including your accountant or trusted advisor in this process to identify any loopholes you may have missed.
2. Consider asset purchasing as an option
It is important to understand why buying this business is the right move for you. Determining whether it’s the client base, the reputation that comes with it or the staff and talent that you will have access to will assist you in making the best deal possible. However, if you only want the plant and equipment, for example, perhaps an asset purchase is more suitable to your needs.
3. Get professional legal and financial advice
As with most major decisions in your business, considering the legal and financial implications is an obvious next step. When purchasing a business getting key advice from experts such as lawyers and accountants is an integral part of the process. Having a lawyer review the agreement will ensure there are no surprises, and having your accountant review the financials will ensure things like tax and compliance concerns don’t become an issue post-purchase.
4. Leasing Agreements
For those businesses that are reliant on a physical location or premises, having full access to the lease agreement is imperative when making a decision to buy the business. Understanding whether this lease is transferrable or whether it is necessary for a new one to be issued could bring to light some issues you hadn’t considered. If a business’ whole success is based on the location of the premises it is always a smart idea to consider what your contingency plan would look like should the leasing terms change.
5. Staff and the wider team
Before entering into an agreement to purchase a business, you will need to consider whether you wish to take on its current employees. You need to be aware of their current employment contracts and your liabilities in accordance with them. If you do take on the employees, the purchase price will generally need to be adjusted to take into account any leave entitlements that are owed to the employees. Should you decide not to take on the existing employees, a prudent purchaser would ensure that the seller pays out the appropriate redundancies. You should also think about the reaction of employees to the purchase of the business; you may encounter low morale, resistance and staff departures during the transition and afterwards if the process is not well managed.
Buying a business is a significant investment and one that will certainly take your business to a whole new level of intricacy. Make sure you are prepared for this almost instantaneous growth to ensure you hit the ground running and don’t extend the settling in period long than it needs to be.
Azure Group offers a range of solutions for business owners that can guide you through the process of expansion; we encourage you to contact us for a confidential review of your individual situation. Please email ourteam@azuregroup.com.au for more information.
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