Business considerations before you sign that business purchase contract and pay over the deposit…

You should think carefully before you sign any business purchase contract and pay over your hard earned cash as deposit to the all-knowing vendor.  Better still, you should seek professional advices.  Don’t be pressured into the deal just because the vendor or their agent says a number of urgent and wonderful things.  If anything, it should be your independent judgment on how urgently you should take an action (and this self assurance comes after careful research of the market and trusted advices).

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There are many things that you should be mindful of, including:

  1. Are you paying the market price?
  2. How well do you know the area?
  3. How well do you know the business?
  4. Is there valid lease in place?  There should be a sufficient lease term left to run with a couple of options (to renew the lease).
  5. Are there relevant permits and licenses for this business?
Financial Statements

You should obtain the financial statements from the vendor and try to verify that the information contained in those statements are plausible and correct.  For example, one of our clients had asked for our opinion on them attending the shop every day for a week (even before signing any contract) and try to estimate the level of actual revenue that the shop was generating.  We advised that this would be time-consuming for them but nevertheless, it was a good idea.  Quite often, the issue with most purchasers is quite the opposite and that they don’t spend enough time or effort in trying to verify the information provided by the vendor (maybe blinded by their love of the shop).  They found that the actual revenue was about half those figures represented in the financial statements and decided not to proceed with the purchase. While they may have a potential claim in misleading conduct under the Australian Consumer Law if they bought the business without knowing this, avoiding the pitfall has saved them headaches, time and costs in trying to make the claim against the vendor through the court processes.

You should also seek advice from professional accountants and business consultants.

Your knowledge of the area

You should find out as much as possible about the area:

  1. the likely clientele for your business.  Are there any major businesses nearby?  Quite often, this is most important factor as the employees from those businesses will need to buy lunches, buy personal items during their free time(s), go to medical clinics, children’s day care centres, buy work-related items, etc.  In contrast, residents living in an area seem more mobile and are willing to travel distances to search for bargains and food.
  2. any possible development in the area such as new office buildings, apartments, roads and public transports.  Quite often, you can get this information so far as currently available from your local council, which you can either visit in person or check through its website.  Quite often though, their websites are not easy to navigate and find the information that you looking for.  If you are looking for something specific, it may be more helpful to do a google search like “[the name of area] future development [your key words]”.  You can then try to use different search terms based on the information you find there.
  3. other information can include crime rates, local schools, any local news, events that are happening in the area and any supply issues.
Your knowledge of the business

According to the Australian Bureau of Statistics, about six out of 10 businesses fail in their first three years of business.

You are more likely to succeed in your business if you pursue the areas that you are knowledgeable in.  Or, at least you start in the area that you are most knowledgeable in and gradually expand into other areas that you are really passionate about.

We find that the most important consideration in the early stage of any business is generation of income either through sales or through fund raising (mostly for the tech start ups).  Without them, you cannot pay for your business or personal expenses and are likely to cease your business within a year, no matter how much savings you have.

Lease on your business premises

If you are paying a good money to buy the business and its goodwill, you want to make sure that there is enough time left on the lease to take advantage of the goodwill that you are purchasing.  If there is less than one year to run on the lease, you will want to negotiate a longer lease term with the landlord and include option terms of, say (two further options of three years each, abbreviated to 2 x 3 years).

If you are starting out from the scratch, you want to negotiate a lower rent and some rent-free period for, say, 3 to 6 months during which you are building up your business and spending money on the fitouts and capital items.  The landlords are quite often susceptible to these requests since they want to attract good tenants and do not want to leave their premises vacant for a long period.

Permits and licences

It is often this last item that people overlook.  From the purchaser’s point of view, the local Council would be the first point of call in trying to verify whether there are any required permits for the business to operate out of the premises.  There are two separate considerations: first, permits for the premises (e.g. food premises, take away shop, physiotherapy, etc) and second, licence for you to carry out the activities (e.g. food hygiene, physiotherapist, accountant etc).  All these need to be satisfied.

The service provided by the government, called ABLIS search can provide you with a very good starting point in relation to considerations that you should give in starting or buying any businesses.

If you find that there is no permit in place after you have started operating your business, there is an unpleasant surprise for significant damage/disruption to your business including fines, costs of DA (development application), loss of income while your business is out of action, etc.  Therefore, it is vital that you check this even before signing any contract.  If there is any issue, you must require the vendor to remedy the problems.

The above advice is not intended to be comprehensive but is provided only for your reference.  You should seek (professional) advices.

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