Purchasing a business is an exciting opportunity, but it carries significant risks and consequences if not approached with the right advice and information. While professional one-on-one advice tailored to your situation is irreplaceable, here are some key considerations when buying a business.

Choosing the Right Entity for Purchase

Before entering into a contract, decide on the entity or business structure. There isn’t a one-size-fits-all solution; the best option varies. Consulting with lawyers, accountants, and tax professionals is essential to evaluate all available options and determine the most suitable structure. Common entities include sole proprietor, partnership, company, and trust.

Choosing the right entity is crucial, especially if entering into business arrangements with partners, joint venturers, or financial supporters. Each entity type has its pros and cons regarding establishment, ongoing costs, and benefits. For instance, one entity might offer flexibility in profit distribution but come with higher operational costs or difficulties in securing funding. Consider the financial risks if you lack sufficient funds for the purchase, establishment, and operation of the business. Some entity structures limit borrowing methods and may require personal guarantees for business loans. Changing the purchasing entity post-purchase can incur significant costs, including stamp duty consequences.

Understanding What You’re Buying: Business Assets or Ownership Interest

Unlike straightforward property transactions, purchasing a business can involve acquiring its assets or the ownership interests (units or shares) in the operating company or trust. Consider whether it’s better to keep business and premises separate or combine them.

Business Assets

• Apportion the purchase price between different asset classes to claim deductions for revenue assets.
• Stamp duty rates are generally higher for asset purchases compared to units or shares.
• GST applies to the acquisition of business assets if the purchasing entity is registered for GST unless the sale is a going concern.

Ownership Interest (Units or Shares)

• The total purchase price is included in the cost base for the units acquired, used to calculate any capital gain or loss when disposed of.
• May allow utilization of any losses or franking credits.
• You might be liable for any tax debts of the acquired entity.
• The sale of units is treated as an input-taxed supply, meaning you cannot claim input tax credits on expenses incurred.

The due diligence process helps determine the better option if the vendor is open to selling either way.

Conducting Due Diligence

Conduct thorough due diligence to make an informed decision about a business’s profitability and suitability. This forensic review of financial records and other documents ensures the vendor’s representations are accurate. Due diligence includes examining:

• Company property
• Leases and licenses
• Client and supplier contracts and terms of trade
• Intellectual property, including domain names and proprietary products or processes
• Employees and their entitlements
• Personal Property Securities Act charges and entries
• Company liabilities
• Plant, machinery, and motor vehicles

Due diligence often requires signing a confidentiality agreement to access sensitive records. An exclusivity agreement may also be entered into, giving the potential purchaser exclusive rights to buy the business if due diligence is satisfactory.

Contracts may allow a specified period for due diligence, with the right to rescind if findings do not reflect the vendor’s warranties or reveal unacceptable risks. Alternatively, contracts might include conditions precedent that must be satisfied before the sale and purchase can be settled, allowing termination if conditions aren’t met. Due diligence, performed by the purchaser’s accountants and lawyers, confirms the business’s viability and verifies the assets and/or ownership interests included in the sale. This process can also reveal the true value of the business, potentially providing leverage to negotiate the purchase price. Only after completing extensive due diligence should a potential purchaser decide whether to proceed with or terminate the purchase process.

Seek Expert Advice

At The Quinn Group, our legal, accounting, and taxation experts collaborate to provide comprehensive advice for business purchases. We guide you through all essential considerations, from business and tax advice to due diligence. If you decide to proceed, we can handle the entire process for you. For any questions or assistance, contact The Quinn Group at 1300 QUINNS (1300 784 667), +61 2 9223 9166, or submit an online enquiry to arrange an appointment.