There are two alternatives to starting a business from scratch: business opportunities and franchises. Despite their similarities and many shared characteristics, they differ in significant ways. According to the Australian Trade and Investment Commission, prioritising research should help individuals determine which type of entrepreneurial enterprise is best for their unique requirements and goals. The amount of money one is willing to invest in the industry may influence this choice.
“Starting a business from the ground up requires much time and effort. If someone wants to start a successful business, they should always plan. The good thing is that they don’t have to go through the entire process. They can start by choosing between franchising or other business opportunities,” says Ashley Hansen of Online Business—one of the top internet resources for the most recent news and information to aid in developing successful firms.
A franchise is referred to as the right or license given by a business (the franchisor) to a person or organisation (the franchisee) to advertise its goods or services in a specific region. On the other hand, a business opportunity is any sale or lease of a good, service, piece of equipment, etc., that enables the buyer to launch a company. Business opportunities cover many different professions.
There are significant distinctions between franchising and business opportunities; therefore, several aspects must be considered before selecting any one. Below are some of the critical differences between franchising and business opportunity.
1. Franchising Cost Vs. Business Opportunity Cost
Few business opportunities require royalty fees, which are often less expensive than franchises. While franchising requires regular royalty payments to the franchisor and higher upfront fees.
2. Franchising Structure Vs. Business Opportunity Structure
The business model created cannot be changed in a mainly organised industry like franchising. On the other hand, the business opportunity offers less structured operations that enable owners to install the most effective techniques for them and facilitate easier business customisation.
3. Franchising Legal Regulation Vs. Business Opportunity Legal Regulation
At least 14 days before the signing or finalisation of any agreement, the franchisor must give the franchisee an FDD. Different states provide different business opportunities. Disclosure of some kind is typically required from the licensee to the buyer.
Explore Your Options With Business For Sale
Without a solid business plan and a lot of effort, no endeavour is safe from failing. Do a lot of research, consult specialists frequently, especially regarding net earnings, keep your expectations in check, and put a lot of effort into growing a company.
Business For Sale has been able to adapt and thrive in a constantly changing environment due to the inherent strength of their company and the knowledge we bring to the table to assist their clients in achieving their goals. People can get information on hundreds of businesses for sale, business opportunities, and franchise systems through their directory.
Contact us or at 02 9281 4599 for more information and learn more about Australia's oldest small business publication distributed nationwide through newsstands.
Single Touch Payroll (STP) reporting has been expanded. This is known as STP Phase 2. If you're not already on board, our resources will help you as an employer to get ready for the changes. They include: updates to the STP Phase 2 employer guidelines new web content to help with reporting, featuring a new series of short, topic-based videos. While STP Phase 2 reporting began on 1 January 2022, you can only start STP Phase 2 reporting when your Digital Service Provider (DSP) updates the payroll product you use. If your DSP has a deferral, it will cover you. They'll let you know if they have a deferral, and when it’s time for you to start. We expect many employers will be transitioning to STP Phase 2 in the coming few months. It's important you understand the changes and get ready to report the additional information and follow your provider’s instructions. For more information visit www.ato.gov.au
Recent data breaches show how important personal information is. This Cyber Security Awareness Month, take the time to check if your cyber security practices need a spring clean with some simple steps.
1. Update your devices and applications.
Regular updates are critical to maintaining secure systems. Cyber criminals hack devices by using known weaknesses in systems or apps.
Check your devices for updates and turn on automatic updates to apply future updates straight away when charging and connected to Wi-Fi.
2. Turn on multi-factor authentication.
Multi-factor authentication (MFA) is a security measure that requires at least 2 proofs of identity to grant access, such as a physical token, random PIN or fingerprint.
Turning on MFA will boost your protection against criminals. While they might steal one proof of identity, such as your password, they will be locked out of your account without the other.
3. Back up your files.
Backing up your data saves copies of your files to an external storage device, or an online server like the cloud. Setting up automatic backups means you can recover your important information if something goes wrong.
Once you've followed these tips you might like to check out the Australian Cyber Security Centre’s Small Business Cyber Security Guide which gives more advice to help smaller organisations build their cyber security resilience.
Remember, registered tax agents can help you with tax advice.
For more information visit www.ato.gov.au
Are you thinking about hiring staff to cover the busy holiday period? Here’s 5 tips to help make your hiring process go smoothly!
1. Understand the steps to hiring an employee
There are many steps to consider when hiring employees and it's important to understand your legal obligations. These include working out the correct employee payments, tax, superannuation, and record keeping.
Use our checklist to step you through the hiring process.
2. Decide on the employment type
Would hiring casuals or fixed term employees better suit your business to cover the upcoming busy period? Both may be suitable for your business as temporary staffing options.
Casual staff have no guarantee of regular work hours. While they offer your business greater resourcing flexibility, keep in mind that casuals are entitled to say no to shifts.
On the other hand, fixed term employees have guaranteed hours for a certain period of time. They can be more of a resourcing commitment, but may offer your business more stability.
Learn more about the different types of employees.
3. Start the hiring process early
With the peak holiday period just around the corner, it’s important to begin the hiring process as soon as possible. This will allow for easier onboarding and training while business is quieter.
Think about other time savers, such as:
documenting key processes in a manual for new starters
organising interviews so they are all held on the same day or hold group interviews
sharing rosters with staff early, to double check staff availability for key dates. This will reduce the need to change rosters later.
4. Advertise your value
Almost a third of employing businesses are having difficulty finding suitable staff, according to the Australian Bureau of Statistics, so it's important to let people know why your business is a great place to work.
Highlight what skill opportunities, support and perks you are offering employees in your advertisement. Use social media to reach out to your networks and spread the word about your value. With staffing shortages across Australia, this will help your advertisement stand out.
Follow our steps to interview and recruit new staff.
5. Create an employment contract
An employment contract is an agreement between you and your employee. It can be written or verbal, but a written contract will communicate your employee’s pay and conditions clear from the start which can help protect your business in the long term.
Our free Employment Contract Tool can help you build your own employment contract for an employee under Australia's Fair Work system.
Create a free employment contract.
Want more?
Find more information on hiring and managing employees.
For more information visit www.business.gov.au
Many businesses operate with stock in trade, but how do you know if you’ll get the benefit of the stock when you buy the business? Due diligence on the stock is essential to helping you understand what you are buying.
What is Stock in trade
‘Stock in trade’ is the goods that are owned or agreed to be bought by the seller which are then sold to customers (whether wholesale or retail) as part of running the business. It might also be referred to as trading stock or inventory, although any reference to inventory might also include the materials and equipment needed to make the stock. If you had a candle business, the stock would include candles that have not yet sold and the inventory might include components, like wicks and wax, that make up the candles.
Due Diligence on the Stock
Undertaking due diligence on the stock means thoroughly investigating what the seller has said about the stock. It involves identifying the stock that is being sold as part of the business and verifying that the seller owns and is able to sell it. Due diligence on the stock involves:
Identify it: Identifying the stock – how much stock is there and exactly what is it.
Where is it? It’s also essential to identify the location of the stock. The stock might be located in a different warehouse or might be in transit to the business or to a customer.
Who owns it? Determine which stock is owned by the business. The stock might have been ordered but not yet paid for. Also determine whether there’s any stock on consignment. ‘Stock on consignment’ refers to goods that are not owned by the business, but instead owned by someone else. The ownership of the goods does not actually pass to the business. The business might only receive a payment of a certain percentage of the sale price or a commission once the goods are sold. The agreements that are in place for the consignment arrangement will also need to be reviewed.
Want it? The goods should be sellable trading stock. If the business has been running for some time, it might have some slow-moving, old or outdated or damaged stock or returned goods that the seller might want to include in the sale. Consider which stock is part of the sale, and whether that stock is currently used in the business. With stock that’s aged, damaged, slow-moving or obsolete, decide whether you will take that stock or exclude it from the sale. Also consider whether the price of those goods, because of their condition, should be reduced.
Count it: The stock should be verified by undertaking a stocktake. The parties should agree on the specifics of the stocktake, such as when it will occur, who will undertake the process and how it should be done.
Stock levels will fluctuate throughout the sale process, as customers continue to buy during this time. If stock levels are low, the seller might need to order new stock. Because of this, the timing of the stocktake is important, and you may need to undertake two stocktakes; one at the beginning of the process to identify the stock and one as close as possible to completion.
Value it: The stocktake will confirm the value of the stock although the levels will continue to move right up until settlement. The purchase price might be valued separate to the value of the stock or a price might be attributed to the stock, on a ‘stock inclusive’ basis. If the stock is included in the purchase price ensure that you’ve obtained an agreed value of the stock and it is not removed from the business before completion.
Disputes and obligations: Ensure there are no current disputes between the seller and any supplier or manufacturer of the goods, and that no debts are owing. Examine how the business deals with returns to the manufacturer (if applicable) and whether the business has a policy on customer returns.
Agree on terms: Once you’ve agreed on the value and the terms of the stocktake, what stock you’ll take, and the extent that any other agreements will impact on your ability to obtain, own, sell and distribute the stock, you need to ensure that the agreed terms are written into the sale contract. Additionally, include a dispute mechanism for if the parties can’t agree on the value of the stock at completion.
Key takeaways: Due Diligence on the Stock
Due diligence is an essential component of buying a business and includes undertaking due diligence on the stock.
Due diligence on the stock includes:
Understanding what stock the business has, including where the stock resides.
Who owns the stock. Is the stock owned and fully paid by the business or is the stock on consignment.
Is all of the stock saleable or is there damaged or outdated stock.
What are the quantities and the value of the stock.
Are there any disputes relating to the stock.
About the Author:
The following extract has been taken, in part, from the book, ‘Entrepreneur Know How – Mindset and Winning Steps for Buying a Business,’ written by Sharon Robson (Available through Amazon and select bookshops – see: https://entknowhow.com/the-bookstoreSharon is the principal lawyer and founder of Antler Legal – a corporate commercial legal practice in Sydney, Australia.
Sharon RobsonAntler Legalwww.antlerlegal.com.au
From 20 September, .au domain URLs are available to the public. These new URLs are distinct from previously available URLs, as they don't include '.com' or '.net' after the unique part of the URL.
Anyone can register your business’s .au equivalent domain name unless you have secured it.
Since March this year, businesses with an existing domain name (i.e, whose websites end in .com.au or .net.au) have been given priority to reserve their matching .au domain name. For example, a business with an ‘ato.com.au’ domain name can also register as ‘ato.au’.
Remember to consider the benefits of registering an .au domain for your business and your individual circumstances. One of the benefits of registering is that you safeguard your brand’s identity on the internet.
If you don't reserve your business's .au domain name, impersonators, web name campers or cyber criminals may potentially take it. The Australian Cyber Security Centre has issued an alertExternal Link on the risk of cyber criminals using your brand’s domain to impersonate your business and conduct fraudulent cyber activities.
You can register your domain name’s .au equivalent at .au Domain Administration Limited (auDA) or through an auDA accredited registrar to protect the digital identity of your brand.
For more information visit www.ato.gov.au
You have found a business that you would love to buy, but in order to operate it, you need to lease the premises. It’ll be essential to determine whether there is a written lease in place, and review that lease, particularly if it’s intended that the business will be operated from those premises after completion. The lease is also a critical element for establishing that you are buying a business as a ‘going concern’, so that GST (a type of service tax) is not payable on the transaction.
Undertaking due diligence on the lease is just as important as undertaking due diligence on the business. It will help understand the terms of the lease and eliminate risks.
So what do you need to look for when reviewing the lease?
Reviewing the lease
The main items that need to be reviewed under the lease are:
Cost: How much is the lease and all costs associated with it? And when will those costs be charged and increased? The amount payable might include:
Rent: Verify the amount of rent that is payable and how often will the rent bereviewed by the landlord and increased.
Rent increases: Usually, the rent is increased on an annual basis either by a set percentage; or by comparing the market; or by the consumer price index. Depending upon how long the lease is and its terms, there might be a combination of ways that the rent is increased. For instance, there might be a three percent increase every year, then if you trigger the option to renew the lease for another period, the increase might be the higher of five percent or based on market review and calculated upon what similar properties are being rented at.
Outgoings: Check whether you are obliged to pay the outgoings, or whether these are already included in the rent that is payable. The outgoings typically are the landlord’s expenses concerning the property and comprise of rates, insurance, fire safety inspection costs, cleaning and gardening, repairs and maintenance.
Period: How long is the lease, and can it be extended or shortened?
Term: Check the duration of the lease, and make sure that there is adequate time left on the lease to operate the business from that location. If you buy a business that only has a short period left on the lease, unless you can enter into a new lease with the landlord, you might not be able to operate the business, which might be detrimental to the business if the business is reliant on that particular location.
Option: Determine whether you have an opportunity to extend the lease, and the time periods and methods in which to exercise that option.
Obligations: What are the tenant’s obligations under the lease versus the landlord’s responsibilities?
Air conditioning: Check the obligations concerning the air-conditioning. The tenant might be obliged to keep the air conditioning in good repair and might only be able to use the contractor that is specified by the landlord.
Repairs and maintenance: Usually the outgoings include repairs and maintenance related to the property and does not usually extend to the tenant being required to fix structural items. However, the extent that you’ll be obligated to repair and maintain the property, particularly if there is existing damage should be checked.
Signage: If you need signage, check whether there are any signage rights and whether a separate signage agreement is in place or required.
Obligations specific to your business: You will also need to check whether there are any requirements that are specific to your particular business and that you can use the premises for the purpose intended by the business. For example, if you are buying a gym which is under a residential building, there will be opening times set by the body corporate. Special flooring might also be required so that the gym equipment doesn’t vibrate through the building and impact on other tenants. There may be council requirements regarding the noise (which might restrict the sound of music coming from the premises) or the ability for people to exercise on the footpath outside the building. So you need to think about whether there are any matters that are specific to the business that you are acquiring.
Exit: How will you exit the lease, and what are your obligations when you leave
Termination: Usually, the tenant can’t terminate the lease and instead takes on the lease for the required term. Sometimes there are termination provisions but only on specific events, such as if the premises is destroyed and can’t be fixed within a certain time period.
‘Make good’ obligations: If the lease is being assigned, the buyer will inherit the existing ‘make good’ obligations. However, you might not be aware of what the premises were like when the seller moved in. So apart from checking the obligations in the lease, ask the seller what improvements they made to the premises, and whether they took any photos at the start of the tenancy.
Fit-out: The tenant might be responsible for the cost of the fit-out. If you’re buying an existing business, determining who paid for the fit-out is vital. If the fit-out has been paid by the tenant, the tenant might be obliged to remove the fit-out at the end of the lease, which if you take over the lease, becomes your obligation.
Existing breaches or obligations: Check whether there are any existing breaches, work orders or disputes by the seller under the lease and whether the landlord has refused to grant an option or renew the lease. Make sure any existing breaches or obligations are settled before Completion, otherwise, they might become your obligation to rectify.
Assign or enter into a new lease:
Depending on the status of the lease, including whether there is a lease or if it has or nearly expired, you will need to decide if you’re going to take over the existing lease, or whether a new lease will be entered into between you and the landlord. If you’re not satisfied with the terms currently in place, you might want to seek an amendment, otherwise you will be bound by those terms. Sometimes however, you might not have a choice and be forced to enter into the existing lease.
If you’re taking over the existing lease, you will require the landlord’s prior consent. Before providing that consent, the landlord might require you to provide evidence of your experience, business references, take out insurances and provide a bank guarantee or agree to a personal guarantee. Remember, personal guarantees should be avoided if possible, given you will then be personally liable, and your personal assets (such as your house) might be at risk.
The timetable should allow for approval by the landlord and the bank (for the bank guarantee). These approvals, if they’re a condition in the sale agreement but are not obtained, have the potential to stop the sale of the business.
To ensure the buyer ends up with the benefit of a business with a premises, and not a business with no-where to operate from, the sale agreement should contain a condition that the completion of the sale of the business is subject to either obtaining a new lease, or the existing lease being assigned to the buyer
Key takeaways: Due Diligence – Lease
To get the full benefit of the business and utilise the premises it is essential to understand the terms of the lease.
Ensure you check:
The cost of the lease including the rent, outgoings and any other obligations that will incur costs.
Review how often, and how much the rent will increase.
How long is the period of the lease and whether the lease can be renewed.
Determine who owns the fit out – and if it belongs to the Seller whether it must be removed at your cost at the end of the lease.
Determine if there are any other obligations, including whether you are obliged to look after the air conditioning, and the extent of any repairs and maintenance.
Understand whether you can instal signage, and what prior consent is required.
Be clear on how you can exit the lease, and what actions need to be satisfied before exiting the premises. Understand who is obligated to make good the premises at the end of the lease.
Determine what consent and details you need for the lease to be assigned or whether a new lease can be entered into.
About the Author:
The following extract has been taken, in part, from the book, ‘Entrepreneur Know How – Mindset and Winning Steps for Buying a Business,’ written by Sharon Robson (Available through Amazon and select bookshops – see: https://entknowhow.com/the-bookstoreSharon is the principal lawyer and founder of Antler Legal – a corporate commercial legal practice in Sydney, Australia.
Sharon RobsonAntler Legalwww.antlerlegal.com.au
Australia is a land of opportunities, and it's no surprise that many businesses want to do business here. But Australia is also a land of challenges for small business owners unfamiliar with our unique culture. The good news is that you don't have to be a local to run a successful business in Australia—but you will need to understand the local market if you want your venture to succeed.
\"I recognise that business owners don't always know the best strategy to market their company. Furthermore, determining if a particular technique is a smart investment might be difficult. Making a decent marketing plan is a fantastic place to start, but putting those plans into action may necessitate business marketing loans,\" says Olivia Jones—business marketing and loan expert at Askfunding.com.au.
Read on to discover why so many businesses are turning their eyes toward this sunny state!
1. Booming Australian Market,
The Australian Government, has been working hard to encourage growth in key industries such as mining and tourism by investing in infrastructure projects such as roads, bridges and tunnels that will improve access for businesses and tourists across the country. The government has also worked closely with local councils to develop policies that promote investment in new development projects, creating jobs for Australians from every walk of life.
2. Rising Spending Power
Australian consumers spend more on new technology, travel and entertainment. They also spend more on food and beverage, clothing and footwear, and health and beauty products.
3. Highly Motivated Businesses To Invest In Their Success
In Australia, business owners are highly motivated to invest in their success. They enjoy long-lasting customer loyalty and have a reputation for being innovative.
Australian businesses gain benefits from this mindset:
Younger entrepreneurs are more likely to incorporate technology into their business models to stay competitive. This can lead to faster development cycles and quicker releases of new products or services.
Australian entrepreneurs tend to be more comfortable with taking risks than other countries' entrepreneurs by nature of their culture; they're less worried about losing money on investment because it's easier for them (and others) to make up lost ground financially by applying for a loan if necessary.
4. Australia Has A Vast Market
If you want to expand your business or start a new one from scratch, Australia is the perfect place. The country has a large market with lots of potentials that you can tap into. Marketing your products or services to Australians is easy because they are generally open-minded and willing to try new things. There are also ways to buy a business without using your money or borrowing money from a typical lender.
Market Your Business With Business For Sale
Australia is a great place to do business, and there are lots of opportunities for entrepreneurs and companies alike, and the market is chock-full of potential customers who want quality products and services at reasonable prices.
Before marketing your business, it is essential to seek out expert advice. If you decide to utilise an agent or broker, Business For Sale can assist you in locating a suitable business broker anywhere in Australia. They can also advise you on how much money you should use for marketing your business and what types of loans would work best for your situation.
Give it your best shot if you have an idea for a product or service that could sell well here. You won't regret it!
The assets of a business are a valuable component of the purchase price. However, the acquisition could be even more costly if you buy assets that are encumbered, or not owned by the seller, or not in working order. Due diligence enables you to understand and eliminate the risks in buying the assets. It helps you to identify the assets that form the purchase price; allows you to determine what the seller has said about the assets and their ownership is correct and helps verify the quality of the assets.
Assets
There are different categories of assets, including tangible; non-tangible; operating and non-operating assets. For the purposes of the sale agreement, some of these assets might be regarded as excluded assets and excluded from the sale.
1. Tangible assets – Plant and Equipment:
Tangible assets are physical assets that can be identified and valued. They include operating and non-operating assets. These assets may change over time in value and quantity. An example of a tangible asset is plant and equipment, which includes photocopiers, printers, forklifts, company vehicles, machinery and furniture, for example. When undertaking the due diligence process, ensure that you undertake the following:
Identify: Obtain a list of the plant and equipment and verify the location of each asset. Check the model numbers and descriptions. The final list, once confirmed and agreed, will be attached to the sale agreement.
Owner: Check who owns the plant and equipment. The business might not necessarily own, but rather, might have leased or obtained finance for the assets.
Agreements: For rented or financed plant and equipment, verify that there is nothing under the respective agreement that would prevent the agreement from being assigned or novated and that there are no onerous terms. Ensure that the seller is up to date with payments and hasn’t breached any obligation under the agreement. Note whether any money remains outstanding on the plant and equipment and determine whether you will take over the repayments or the plant and equipment will be paid by the seller before the sale completes.
Test: Test the plant and equipment to make sure it’s in proper working order. If any equipment isn’t working, request that the seller repairs it before the sale completes, or exclude the plant and equipment from the sale.
Maintained: Check that the plant and equipment has been adequately maintained. Review when and how often it has been serviced and that the servicing was undertaken in accordance with the applicable maintenance agreement and by a qualified person. If there are any maintenance contracts, these should be reviewed. For any equipment that hasn’t been maintained, consider having the seller service it before the sale completes.
2. Intangible assets – Good will and Intellectual Property
Assets that are intangible, might not be physical assets. An example of assets that are intangible are goodwill and intellectual property.
(a) Goodwill:
Good will is an amount that the buyer is willing to pay to recognise the reputation of the business. To determine whether a business has good will, check to see whether they have strong branding; a customer list with repeat and loyal customers and something that can differentiate the business from similar businesses, such as proprietary technology or software.
(b) Intellectual Property:
Intellectual property is a valuable asset of the business although it might be difficult to value. When undertaking due diligence on the intellectual property, ensure that you:
Identify: Identify all of the company’s intellectual property, whether registered or unregistered. Intellectual property includes, but isn’t limited to, the business name; the business contacts; client lists; the social media accounts; confidential information; know-how; formulas; works; trademarks; service marks; designs; patents; copyrights and policies and procedures.
Ownership: Understand who owns the assets. The intellectual property of the business may not be owned by the company selling the assets, but by a separate entity either to protect the intellectual property or because it was acquired by a shareholder, say, before the business was operational.
Copyright: Examine who owns the copyright in the materials, such as the policies and procedures or articles, that you’re acquiring. The owner of the copyright is the author of a piece of material. If the author is an employee of the business who has completed the work during the course of their employment, then the employer will own the copyright in the works. However, if a consultant completed the work, they will hold the copyright unless it has been assigned to the seller.
Agreements: Obtain all of the back up agreements relating to the intellectual property, so you can be sure who owns it and whether the intellectual property is licenced, or has been assigned effectively through a deed of assignment.
Assignment / Transfer: In regard to the assets that you have agreed to acquire, it is not enough to provide for the assignment or transfer in the sale agreement. Ensure as part of your due diligence that you check the requirements on how to assign or transfer each type of intellectual property to ensure that you get the benefit of the asset following completion.
3. Operating and Non-Operating assets:
As you are reviewing the assets, you might come across references to operating and non operating assets. These assets are merely components of tangible or non-tangible assets but reference to operating or non-operating assets is dependent on whether or not these assets are used in the business.
Operating assets are used in the business regularly to produce goods or services and may be tangible assets, such as cash, stock and plant and equipment or intangible assets, such as good will and intellectual property.
Non-operating assets are assets that have been acquired, but might not be used daily in the business. They might be obtained for investment or contingency reasons. Shares acquired by the company or equipment that isn’t being used are examples of non-operating assets.
4. Excluded assets:
Excluded assets, are usually assets that are excluded from the sale, either because the buyer does not want to acquire the asset; the asset is not owned by the seller so the seller does not have authority to sell it; or the seller owns the asset, but has excluded the asset from the sale. These assets should be listed and attached to the sale agreement as excluded assets and the value of them should not be included in the purchase price.
Key takeaways: Due Diligence on the Assets
Due diligence on the assets owned by the Company or the Business is an essential component of buying a business.
Due diligence on the assets enables you to:o Identify the assets.o Investigate who owns the assets.o Determine the value of the assets.o Identify any risks relating to the assets; ando Qualify the processes that need to be fulfilled to fully acquire and receive the benefit of the asset.
About the Author:
The following extract has been taken, in part, from the book, ‘Entrepreneur Know How – Mindset and Winning Steps for Buying a Business,’ written by Sharon Robson (Available through Amazon and select bookshops – see: https://entknowhow.com/the-bookstoreSharon is the principal lawyer and founder of Antler Legal – a corporate commercial legal practice in Sydney, Australia.
Sharon RobsonAntler Legalwww.antlerlegal.com.au
Validating the purchase price The purchase price of a business is often calculated on the value of the revenue or earnings generated by the business less the expenses accumulated to generate those sales. The value might also be determined by comparing similar businesses, or if there is no revenue, the price might be determined by the value of the assets of the business. Due diligence on the business’s financial reports, source records and data and depending upon the valuation method, the results of similar businesses, helps validate the value of the business. However, there might be some of the following circumstances which mitigate the perceived value and potentially allow an adjustment to the purchase price. 1. Financial reports If the value is equated on the revenue and expenses, request the financial reports and source documents including the profit and loss report for the current and previous two or three years. Review the financial reports carefully, including the sales, income and expenses and the value of the company’s assets, liabilities, creditors, and debtors. The information on the report should be compared to actual receipts and invoices to ensure that the figures are correct. The financial figures can support the valuation and determine how well the business is proceeding over time and whether it’s been impacted by market conditions or other factors. If you notice for example that there has been a decline in profitability, this might alert you to potential business issues, including with management; the product or service; or market events. Any potential issues have the capacity to reduce the perceived value of the business. 2. Expenses Expenses can be divided into regular, discretionary and capital expenses. Discretionary expenses are one-off expenses which might be incurred by the business. These expenses are not required regularly and may change according to the activities of the business. Examples of discretionary expenses include advertising or training. Capital expenses are more expensive and incorporate items that add value to the business. They might consist of costs for photocopy machines or computers. Depending upon how you plan to operate the business after completion, some of the expenses could be reduced or increased. Expenses are usually, but may not always be, listed in the financial reports. A business might enter into a contra deal, which involves the exchange of skills for goods or services but may not record the arrangement in the accounts. A coffee shop might provide free meals to a graphic artist in exchange for signage for example. However, if this arrangement is not continuing after the business is sold, but the business still requires signage, then the cost of that signage should be factored into the cost of the business. You should also review staffing arrangements. If the existing owner has operated the business without a salary, you will either have to replace that worker personally, or employ someone to do the work, which would reduce the business’s perceived value. If the perceived value is reduced, then the price might be able to be renegotiated. 3. Creditors and Debtors The business might owe money to others (creditors) or be owed money for goods or services it has provided (debtors). Determine whether this money is for once-off services or payable on a regular basis. Creditors and debtors will have a different impact depending upon whether you are buying the business or the shares in the company that owns the business. If you are buying the business, typically you take the benefit of the business from the date following completion and any money owing by or due to the business at completion is for the seller. However, if the payments relate to assets that are required to operate the business, then it will depend if the business will continue to receive the benefit of that asset following completion. Suppose money is owed to a coffee manufacturer. If the seller paid for the coffee, but the coffee will not be received until after completion, then the purchase price should be adjusted to allow for this purchase or the new owner might reimburse the seller as an adjustment to the purchase price on completion of the sale. If you’re buying the shares in the company, given the company does not change after completion, any payments and debt will continue to remain with the company after settlement. For debtors, find out how long have these payments been outstanding and the likelihood of receiving payment. If these are aged debtors and unlikely to be recovered, ensure their value is not included as revenue. 4. Work in progress ‘Work in progress’ refers to partly performed jobs that are yet to be completed although they might already be paid for by the customer, such as when a customer pays for a gift certificate but has not received all of the services. If these jobs are not identified during the due diligence process, it might result in the business having to perform the work after buying the business but not being compensated for it. The due diligence should involve understanding the status of the work, including where each job up to; the extent that the work has been paid for by the customer and the cost of delivering the work. Also determine who will settle the work after completion and whether that party has been paid for it. If the work is to be completed by the buyer, but if the customer has already paid the seller for the work, then there should be an adjustment to the purchase price on settlement. 5. Assets The due diligence on the assets should commence with determining why the business does not have revenue it can base the valuation of the business upon. Is it as a result of poor management, issues with the product or service or issues in the market for example. Due diligence should include reviewing the assets, and ensuring that they are in good working order, and the value is only attributed to assets that the business owns. If the assets are under finance, determine how much debt is owing on them and whether the finance will be paid out before completion. Unless you want the benefit of the asset that is subject to the liability, you might agree on adjusting the purchase price to allow for the debt, otherwise, the liability and the encumbered asset might stay with the seller. 6. Market Often the purchase price is calculated by reference to similar businesses in the industry. In this case, the due diligence should not only involve reviewing the business, but the market and competitors to determine whether the business has the capacity to perform on par or better than the market, and whether there are any contingencies that would vary that market value. If the business is operating under current benchmarks or if it must spend additional money to compete, then the perceived market value of the business will be reduced. Key takeaways: Value and the Purchase Price The seller usually establishes the sale price of the business on a particular valuation, which might be based upon revenue and expenses; market; or on the assets. Undertaking due diligence can identify features in the business which will reduce the perceived value of the business, which might allow for the renegotiation or adjustment of the purchase price. About the Author: The following extract has been taken, in part, from the book, ‘Entrepreneur Know How – Mindset and Winning Steps for Buying a Business,’ written by Sharon Robson (Available through Amazon and select bookshops – see: https://entknowhow.com/the-bookstoreSharon is the principal lawyer and founder of Antler Legal – a corporate commercial legal practice in Sydney, Australia. Sharon RobsonAntler Legalwww.antlerlegal.com.au
According to the Reserve Bank of Australia, the business loan margin is 2.4% as of July 2021, 4.3% for small businesses, 2.70% for medium businesses and 2.0% for large companies. \"Business loan is a financial instrument given by banks and other financial institutions to business owners to finance their businesses. A bank may offer a business loan to a company if they believe it has a good chance of repaying the loan,\"says small business loan provider Shane Perry of Max Funding. If you have been looking for a way to finance your business, you should consider applying for a business loan. Check out these six simple steps. Step 1: Determine Your Needs The first step to getting any loan is determining what you need. You should know precisely how much money you need and what you plan to use it for. If you don't have a clear idea of what you want to do with the money, then you won't be able to get a good loan. Step 2: Find Out How Much Money You Can Afford To Borrow Once you've determined what you need, you'll need to find out how much money you can afford to borrow. There's no point in borrowing more than you can afford. Step 3: Get Pre-Approved If you apply for a business loan, you'll need pre-approved. Getting pre-approved means telling the lender how much money you can borrow, and they give you a number based on that information. Step 4: Apply Online Now that you're approved, you'll need to fill out an application online. Don't worry about making mistakes; the lender will review your application before giving you approval. Step 5: Get Funding Approval After you submit your application, the lender will check to ensure everything is okay. Once they approve your funding, you'll receive your funds via direct deposit. Step 6: Make Payments On Time Make sure you pay back your loan on time. Lenders may charge late fees if you miss payments. Advantages Of Getting A Business Loan There are many advantages to getting a business loan. Here are some of them. 1. Easy Access To Funds Getting a business loan is not difficult at all. You do not need collateral to get a business loan. Banks and other financial institutions make money by charging interest rates. Therefore, they are willing to lend money to people who are likely to repay the loans. 2. Flexibility A business loan gives you the flexibility to make changes to your business plan. If you keep making payments on time, you can change your mind and decide to return to school or take a break from running your business. You can easily borrow additional funds if you plan to expand your business. 3. No Hassle When you apply for a business line of credit, you only need to provide information about your business. Your lender will review your application and approve or deny it within 24 hours. 4. Tax Benefits If you are self-employed, you can deduct certain expenses related to starting a business. These deductions include advertising costs, rent, supplies, and legal fees. 5. Better Credit Score Your credit score affects your ability to obtain loans. If you have bad credit, you will find it hard to get a personal loan. However, you will have no problem obtaining a business loan if you have a good credit score. Disadvantages Of Getting A Business Loan in Australia Aside from the advantages, there are also some disadvantages of business loans. Check it out below. 1. Higher Interest Rate Lenders charge higher interest rates compared to personal loans. 2. High Cost Repayment of the loan requires high monthly instalments. 3. Limited Options Only certain types of businesses qualify for business loans. 4. Long-term commitment You cannot withdraw your funds at any point in time. Grow And Expand With Business For Sale Before applying for any type of business loan, it is essential to seek out expert advice. A financial advisor can help determine whether a business loan is right for you. If you decide to utilise an agent or broker, Business For Sale's connections can assist you in locating a suitable business broker anywhere in Australia. They can also advise you on how much money you should borrow and what types of loans would work best for your situation.
Undertaking due diligence on the business is one of the most critical processes needed to eliminate risk when buying a business. Undertaking due diligence means thoroughly investigating what the seller has said about the business. It involves identifying the assets that are being sold and verifying that the seller owns, and is able to sell them. The broad steps to undertaking due diligence are: Step 1 - Information request Request from the other party all of the information that you’d like to review. This information should include all material information regarding the company or the business that is being acquired. Some of the information that should be gathered includes: Corporate information: If you’re buying the shares in the company, you will need to obtain the corporate material relating to the company. This includes the history of the company, the constitutional documents and the company registers. Material agreements: You need to obtain all of the material agreements to review so you can determine whether there are any on going obligations following completion and whether there are any agreements which might impede the sale of the company or the business. Goods and services: Obtain the details of any material agreements relating to the goods and services so you can understand the obligations and whether there is any limitation to the ongoing manufacture, supply, storage and distribution of any goods or services after the sale completes. Lease: Obtain a copy of the lease for the premises, and any other licence or lease agreements relating to the assets. Check to determine whether you need to obtain the other party’s consent to assign the leases and licenses or whether you need to enter into new agreements. Financials: The financial information, including details of liability, loans, financial reports and statements help to establish the purchase price. Request for review the financials for the previous two or three years plus a list of debtors and creditors and forecasted budgets. Assets: In order to understand what the business owns, obtain a copy of the fixed asset register and all material agreements relating to the assets, and details of whether any of assets are secured in return for finance. If there are assets that are secured the security should be released before completion. Intellectual property: Intellectual property is usually a valuable asset of the business. Obtain the details of the intellectual property, including any trademarks, domain names, copyrights, business names and agreements relating to intellectual property. Litigation: Determine whether the business is subject to any litigation, whether current or contingent. Litigation is costly and might have an impact on the reputation of the business. Employees and contractors: Obtain the details and records of the employees and contractors and determine who will continue following completion of the transaction and whether new contracts need to be entered into. Customers and marketing: Obtain the details of customers and sales and cross check this information against the financials. Understand how potential customers are marketed to, including whether there is a marketing plan. Policies: To gain a better understanding of how the business is operated, review the policies and procedures of the business. The above is some of the main items of information that you should obtain, however depending upon the business, other information will likely be required. The information will be facilitated manually or via a due diligence room, which is a portal where documents may be requested, uploaded and reviewed. Step 2 - Review The next step is to review all of the information received from the seller, or sourced via searches and market and industry reviews. There are four areas of review, including: Legal due diligence: The legal due diligence includes: Identifying all material information and documents concerning the business to determine the risks and whether any matter needs to be addressed prior, during or following the sale. Checking the contracts and the lease arrangements for their terms, identifying any onerous obligations, and ensuring that following the sale, you can obtain the benefit of them. Examining the business to identify any requirements that would prevent the transfer and change of ownership of the business. Identifying and verifying the ownership of the assets and determining the steps required to sell, assign or transfer the assets. Determining whether there are any associated risks with the assets, including any potential debt owing, breaches, litigation or failure to renew terms of any material agreements which might be essential for the business to continue operations. Financial due diligence: The financial due diligence includes: Double-checking the basis for the calculations in the financial statements which equate to the deemed value of the business. Verifying whether the sale price accurately reflects the value of the business. Determining the status of the assets and liabilities, creditors and debtors. Assisting with structuring the purchase price and the value attributed to the assets. Commercial due diligence: The commercial due diligence includes: Ascertaining whether the business has the documentation in place to reflect the commercial dealings. Whether there are sufficient assets to operate the business. Whether there are adequate supply arrangements in place. Industry and market due diligence: The industry and market due diligence includes: Checking the industry and understanding the risks in the business or industry that the business operates within. Undertaking market research. This process will provide you with a greater understanding of the target market, industry standards, the strengths and weaknesses of the business and whether there are any threats and opportunities. Step 3 - Clarify After reviewing the information that has been received, obtain clarification on any information that has been omitted or which is unclear. Sometimes the other party might provide further details readily upon request. Other times, the information might not be entirely clear, and extra insights about the business must be elicited. Due diligence will form the basis of any further negotiation, the drafting of the sale agreement, and the inclusion of any warranties or indemnities. Due diligence must be completed before a binding contract is signed. If the sale contract is signed before the due diligence is complete, the binding agreement should be conditional upon the due diligence being completed to the buyer’s satisfaction. If you’re not happy with the results of the due diligence, even after asking for clarification from the seller, then if the agreement provided a condition that the results of the due diligence must be satisfactory to you, the transaction can terminate, or different terms may be arranged between the parties. How much due diligence should I do? Some people may consider that the business they’re buying is not worth much, so why bother spending the money on due diligence. If you take that approach, you might not be clear on the business that is being acquired, and many things can go wrong. You could rush into the transaction and underestimate the time required to transfer the assets, and not receive the title of all the assets. You may end up owing money under a contract because you didn’t review it. In practice, how much due diligence you should do and the cost you’ll spend on the process will depend upon what’s practical and commercial. It’ll include taking into account the cost of the business and any perceived risks. Key takeaways: Due Diligence Due diligence is an essential component of buying a business and includes legal, finance and market due diligence. It includes requesting the information that you need to review, reviewing the information and clarifying any information that has been omitted or needs further explanation. Due diligence enables you to investigate the business and the ownership of the assets, to determine risk and to qualify the processes that need to be fulfilled to fully acquire and receive the benefit of the business. About the Author: This extract has been taken from the book, ‘Entrepreneur Know How – Mindset and Winning Steps for Buying a Business,’ written by Sharon Robson (Available through Amazon). Sharon is also the principal lawyer, director and founder of the boutique law firm, Antler Legal – a corporate commercial legal practice in Sydney, Australia. She has played a key role in facilitating, advising and negotiating many business transactions on behalf of her clients. Sharon is also a speaker, marketer and business owner. She is passionate about mindset and empowering people through education. Sharon RobsonAntler Legalwww.antlerlegal.com.au
