8 STEPS TO

BUYING A BUSINESS
Presented by Divyesh Gandhi

ARE YOU CONSIDERING

BUYING OR ACQUIRING
AN EXISTING BUSINESS?

1. MAKING CAREFUL
CONSIDERATIONS

Before buying an existing business, you must weigh the pros and cons of doing so.

A compelling reason for opting to buy an established business is the presence of a track
record and a reputation.

A good business history can increase the likelihood of a successful operation and ensure
that finance is easier to obtain.

1. MAKING CAREFUL
CONSIDERATIONS

There is less worry about making yourself known so

finances can be saved. This means that although you have
little room to personalise your business from the start, you
will inherit, everything good (and potentially bad) about the
business.

If you do not already know the business beforehand,

potential disadvantages can be the inflation of the goodwill
element and a negative reputation inherited from the
previous owner.

2. ASKING THE RIGHT QUESTIONS

When deciding to buy a business, start by asking what may seem obvious
questions. Answers to these will help you decide about taking the plunge and
about how to formulate your purchase agreement later on.
Some typical questions include:
Why and what are the reasons for the business
being sold?

What

is

the

history

and

reputation

of

the

business?

What are the industry trends and patterns?

Who are the customers?

Who are the suppliers?

Who are the competitors?

What are the running operational costs and

overheads?

Who are the employees, how many are there and

will they stay?

What are the profits?

What are the assets and liabilities?

3. ACCOUNTING
DUE DILIGENCE

An accounting due diligence is a

thorough check to evaluate the
financial health of the target
business.

Get certified financial statements

which are correct and properly
represent the trading figures of
the business.

Figures provided under a

disclaimer are a tell-tale sign that
the seller or the
accountant/auditor preparing
them is either unwilling or unable
to vouch for their accuracy.

are examples
what
you
need to
about
accounting due diligence:
A trading orofprofit
and
losswill
statement
forknow
the last
two-three
years;
A balance sheet to identify assets and liabilities;
A list of plant, equipment, fixtures and fittings, which the owner
intends
to sell and a current valuation and proof of any applicable
warranties or
guarantees; and
Details of any stock sold with the business and how it will be
counted
and valued at settlement.

4. LEGAL DUE DILIGENCE

Depending on the size and complexity of the business in question, a legal due diligence
exercise often takes time and covers several areas and aspects of the way the business
operates.

When conducted by lawyers, you will be able to understand issues

such as the following:
Ownership and shareholder issues;
Interpretation of the various contracts which have been signed by the business,
including contracts with suppliers, employees, loan documentation, asset ownership and
title, leases and licenses negotiated and the existence of restraint clauses;
Whether there are charges, encumbrances or liens on any property, assets or
machinery;
Intellectual property issues;
Privacy obligations such as employee information, customer information, trading
partners/business associates information and marketing files under the Privacy Act; and
Litigation history to see who the company has sued or who has sued it.

5. TAX DUE DILIGENCE

Understanding GST issues, stamp duty and corporation tax is vital. Your accountant will
be able to advise you on the seller's financial statements, the market value of the
business, GST, Capital Gains Tax and other tax issues.

He/she may also advise on appropriate business structure options, and to assist with
budgets, cashflow forecasts, and projected financial statements for you.

6. NEGOTIATION

After having conducted the due diligence steps mentioned above, you will be able to
enter into preliminary discussions about issues such as price negotiation, valuation
techniques, obtaining any relevant government approvals, handling any licensing
issues, identifying key value preservation issues like employee retention, transition
planning and any other matters that will be documented in the contract documentation
stage.

7. CONTRACT
DOCUMENTATION

Details relating to any transaction for the sale or purchase of a business should be
documented identifying the subject of transaction, the consideration involved and the
expected obligations of the parties.

Entering into a purchase

agreement that addresses the
following is therefore crucial:
Identifying the assets to be acquired;
Price and payment
payment stages;

modes

including

Conditions precedent to completion, e.g.

third-party approvals, landlords' consents
to assignment of leases and release of
bank security over assets;
Transferring employees;
Assignment or novation of contracts of
the business;
Dealing with debtors and creditors of the
business after completion;
Arrangements for completion;
Post-completion restrictions on the seller;
Warranties and indemnities, providing for
recourse by the buyer against the seller
Limitations on the sellers liability,
including time limits for making claims
and financial limits.

Your legal advisers will also be able

to advice you on any ancillary
documents needed to complete your
purchase, such as:

ignments of goodwill and intellectual property rights;

vation of key contracts;
w service contracts/employment agreements for employees;
nsfers of any freehold premises;
ignments of any leasehold premises; and
rd and shareholder approvals (if necessary).

8. COMPLETION & BEYOND

As a buyer, you become the beneficial

owner of any individual asset of the target
business
only
after
all
necessary
formalities for completing the transfer of
that asset have been complied with.

Although many assets may transfer upon

completion, you may need to take the risk
that some may not transfer until
sometime afterwards, or at all.

The purchase agreement drafted by your

legal adviser will be able identify those
matters required to be dealt with or
waived at completion, including payment
of any part of the price then due.

8. COMPLETION & BEYOND

Be aware that a number of matters also need to be attended to postcompletion, including:
The payment of any stamp duty, land tax or GST;
Formal assignments or novation of any contracts of the business not dealt with at
completion; and
Notices of change of ownership of the business to its customers, suppliers and to relevant
regulatory bodies.

Doubt Is An Acid Which

Dissolves All Our Success
Plans Into Dust! Start
Trusting Own Abilities
Instead of Trusting of
Others Only!