08 November 2018
Buying or selling a business can be complicated and there can be many unexpected hiccups if you don’t engage the right partners and follow the right processes.
In this two-part series, we sit down with AR Advisors Director, Kris Elliot, to find out more about the risks involved in buying and selling a business, and the things you need to consider, to make sure you come out on top.
PART 1: Buying a Business
What’s the number one piece of advice you would give to someone who is thinking ‘I want to buy a business’?
I would say that the most important thing to know about buying a business is to try and avoid getting caught up in the excitement of it all. Buying a business can be exciting and emotional, but at the end of the day it is your livelihood at stake and you need to put this excitement aside to rationally evaluate all aspects of the sale – is it the right business for you, are you paying the right price, and are you setting yourself up for the future?
Ok, so let’s say I’ve got my rational decision-making hat on, where do I start?
The first thing you need to understand is what you are buying. Are you buying the entire business or an individual’s share in the business? Are you just buying the goodwill and assets? Is there any stock to acquire in the case of a trading entity? This will inform considerations around risk and value.
The next thing you need to consider is what entity or structure you are going to use to buy a business. Will you use an existing business entity or do you need to set up a new entity? There are several factors that influence the business structure, including whether you are the sole or joint buyer or shareholder, the risks attached, and what your long-term plans are.
And what about the purchase price. Surely that is one of the most difficult things to navigate when you buy a business?
Yes, that’s right. Buying a house and knowing you’re paying a fair price isn’t easy, and it’s even harder when it comes to buying a business. Once you’ve agreed upon the sale price in principal, you need to make sure you spend the time doing your due diligence. This is one of the main areas where emotions can get in the way. People get so excited about the prospect of owning a particular business that they pay above what they should. A seller is always going to do everything they can to push up the sale price as high as possible – it’s in their best interests to do so. It’s up to you and your accounting partners to consider your interests, and work through the data to sort fact from fiction and determine what a fair valuation really is.
But can’t you just look at a business’ profit & loss and balance sheet? Doesn’t that tell you everything you need to know about what it’s worth?
It firstly depends on whether you are buying the whole company or just the business, and even then just looking at a business’ financials isn’t enough. You’ve probably heard the saying ‘cook the books’. Falsification of data and overstated sales and profit figures are something you need to look out for when evaluating the proposed sale price. You need to look at the full picture of current and prior year records, including financial statements and bank accounts, and you need to piece it all together to understand what it’s really telling you about the state of the business.
So, you’re saying you need to do a bit of detective work then?
I guess that’s one way of looking at it. The main thing is making sure you’ve got the right partners to help you through the sale and to take care of this due diligence for you.
And what other considerations are there other than what you’re buying, the entity you will use to buy it and how much you should pay?
How you pay for it is the other consideration. If you’re financing the purchase you need to make sure this is all set up correctly and, importantly, make sure it’s financed under the right name. People often don’t realise how small things like this can affect your tax position as an individual or as a family.
Do you have any other final tips for people looking to buy a business?
Yes – you need to get your paperwork right! Get your accountant to connect you with a good lawyer who will ensure your contracts contain the right language and necessary clauses. For example, including a clause in the sale contract that states that the purchase price is subject to a due diligence review can give you an out if the numbers don’t add up.
So, if someone is thinking about buying a business, who should they talk to first?
Well, if it’s going to be a family owned business, you should talk to your family first. After that, you should talk to your accountant. We can facilitate the process and help you navigate the complexity of it all. We can also connect you with other partners when required throughout the process, such as lawyers, as we have relationships with people that we trust to deliver the best possible outcomes for our clients.
If you would like to know more or are thinking that you’d like to buy a business, get in touch with Kris and the team at AR Advisors - info@aradvisors.com.au
And If you found this article usefull, why not read Part 2 of our Q&A with Kris Elliot!