Finance Small Business Buying a small business – there’s lots to think about

Buying a small business – there’s lots to think about

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If you dream of being your own boss and are considering using a redundancy payment, a mortgage drawdown or your hard-earned cash to buy a small business, there are lots of things you need to think about before making a commitment.

The first consideration is whether you are really cut out to be a businessperson.

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Are you the new Richard Branson?

Ray Barrett, principal at law and accountancy practice Barrett Walker, says business can be risky and demanding and many people “would be better off working for a big company or the public service  than going into small business”.

You might have the desire to run a particular type of business, but do you have the training, temperament and ability necessary to be successful?

If you take all that on board and still fancy yourself as the next Richard Branson, then proceed with care.

Once you’ve found a prospective business, you need to undertake adequate due dilligence.

Mr Barrett says the first thing to do is have a good look at the vendor statement that details “turnover, the number of staff, hours of operation and any lease contracts”.

Don’t take things at face value: look at the invoices and do a trial in the business yourself to make sure the figures add up.

Alan Wein, lawyer, business mediator and business commentator, says don’t be afraid to pay for good financial and legal advice.

“In most of the hearings I conduct (as a business mediator on business sales disputes) advice was either not sought or ignored,” Mr Wein says.

Take care with leases.

Be careful of leases and contracts 

It is vital to understand the detail of leases on business premises so you are aware “of your rights and obligations”, Mr Wein says.

“I’d go through a lease with two different marker pens and highlight my responsibilities in green and the landlord’s in yellow,” he says.

Check any planning permits associated with the business and make sure they are being complied with.

For example, if you are buying a restaurant or cafe check that it is licensed to cater for the number of people currently being served.

The vendor may be boosting turnover by increasing table numbers illegally.

“Do a roads authority search to make sure they’re not planning to dig up the road outside your business for six months which will restrict access by customers,” Mr Barrett says.

Another important thing to check is whether the business has all the necessary licenses to operate and whether these will be transferred to you as part of the sale.

Understand franchise agreements

If you’re buying a franchised business check that the franchisor is a “reputable organisation that is not in a lot of disputes with franchisees”, Mr Wein says.

Get your lawyer to make sure the franchise document is compliant with regulatory requirements and make sure you understand the financial and capital requirements that go with it.

Understand employee entitlements.

Employees and their entitlements can be tricky

Make sure you understand all the entitlement liabilities that go with the workforce like annual leave, long service leave, workers compensation, superannuation and occupational health and safety demands and that there is enough money coming in to pay them.

Time is of the essence

“As well as being clear about how much money you need to invest, think about the time and effort you have to invest,” Mr Wein says.

There is a cost to your time and you need to be adequately rewarded for that to make the business viable and your life liveable.

Suppliers are vital

The people who supply the business are vital to your success so check that they are reputable and understand their capacities.

If you want to expand the business, are they capable of growing with you?

Look at the contracts and agreements the business has with suppliers and what do they commit you to.

Debt and ownership structure

Understand the structure you are buying with the business.

Are you buying simply the assets of the business as a going concern or buying a company or trust structure that in turn owns the business?

Be sure to get your lawyer to look at the structure and make sure you are not buying liability for any debts you may not know about.

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