If you are in Australia and if you dream of buying a business, then this is the best time to take the plunge. Here’s why.

The Australian economy, experts say, has the muscle to navigate the global downturn in a short period of time.

A report from Sensis Business Index states that though confidence levels among SMEs (Small Businesses and Entrepreneurships) are still shaky at a mere 12%, it has only fallen 1% in the last three months, as opposed to a 13% fall in the quarter that ended in December.

Even established businesspersons are seconding this rising confidence. Recently, retail king Gerry Harvey categorically rubbished rumours that Australia may be heading for a major crash reminiscent of the Great Depression. According to Harvey, Australia has a far stronger economy than dithering economies like the US and Britain. 

Harvey and others like him are not far off the mark because indicators show that Australia has entered this difficult phase as one of the strongest among all Western economies. Australia’s four major banks are in the forefront when it comes to global rankings. Corporate balance sheets are healthy and the central budget is still enjoying a surplus. All good news.

Of course, the country’s growth curve has slowed down because of the mild recession that has hit our shores as a ripple effect of the global downturn. But substantial interest rate cuts, a weaker currency and the government’s stimulus packages support growth within the country even though there is financial gloom in the rest of the world. Also, the economies in China and India are expected to bounce back quickly, thereby facilitating the growth of the Australian economy.

That is why, for people who are experiencing the entrepreneurial pull, the current market is nothing to be afraid of. Instead, there is much to be gained from this momentary pause.

You may be tempted to believe otherwise. After all, the media is replete with news of record layoffs, low productivity and credit crunch. But what it doesn’t always share with you is the fact that while many industries are tightening their belts, many others are actually doing very well, hostile climate and all!

Top heavy organizational structures are biting the dust, but small businesses with less overhead, low operating costs and slim to nonexistent bureaucracy are thriving in this downturn. It’s happening right in front of your eyes.

Web geeks have replaced giant IT companies in fielding inquiries from corporate clients and laid off bankers are opening boutique investment banks. These small shop owners could well usher in what is being called the ‘Little Guy Economy’. The writing is on the wall: while the biggies are frozen in the act, the little guys are busier than ever. Their slogan is cheaper, faster, lighter. So, your dream of owning and running a small business successfully is spot on in the current financial climate. 

There are also other reasons for why now is the best time to buy a business. For one thing, any business that is surviving in this dismal downturn has to be a good business. When things get better, future prospects also improve correspondingly. More importantly, there is the cost factor to consider.

Cocky business owners who walked away from lucrative offers in the past are open to easier and more favorable terms in a recession because valuations are depressed and there is little competition to complete a deal. For a company that is ravaged by the pressure to sell, the right buyer is a white knight. In short, it’s good news to be a buyer in a bad market.

The success mantra for small entrepreneurs is short and simple: buy low, sell high. A clever businessperson always aims to buy when the market is at its rock bottom than buying at the top only to see the business crashing when the going gets tough. History has shown that industries than tanked in the depression of the 80s and 90s came back in a big way to provide huge returns to buyers who ventured to take the risk. This market is offering you one of the lowest rates ever.

So, if you want to make a success of it, you must get off the fence and buy a business that interests you while the opportunities are hot.

This book has all the information to show you exactly how you can go about buying your own business in Australia. It is a guideline that starts at the very beginning – how to spot the right business – and takes you through the process of completing the deal and running the business successfully. In the last section, you will also find a list of valuable references and resources that will give you the latest information and updates on various aspects discussed in this book.

There is no denying the allure of buying a business because the ownership of a profitable enterprise is very rewarding in many ways. But, buying a new business can also be a rather overwhelming experience, particularly if you happen to be new to the process. It pays to start right and keep going in a smooth and orderly manner.

The first step is knowing what business to buy. This is where it all starts. Certain considerations can help you spot the right business. These are discussed in the first chapter.

Buying a business

Buying an existing business is one of the easiest ways to become a business owner. Buying the right business has several advantages:

Ø      Startup costs are low.

Ø      Existing inventory and ongoing receivables make it possible to receive immediate cash flow.

Ø      Comparatively less exposed to risks because most businesses that have been running successfully for a while would have ironed out any worrisome issues that a new business faces.

Ø      Existing businesses know the particular requirements of their niche and are quite efficient in delivering what customers want.

Ø      If they have a proven track record, such businesses enjoy good customer loyalty and have a ready market. Established customers and reliable incomes are a huge plus.

Ø      Experienced workforce who are equipped with the resources to meet challenges.  

Despite all these advantages, new business ownership has an extremely high mortality rate.

According to statistics, only 20% of all potential business buyers ultimately buy the business they want – and succeed.

Reasons for the dismal figure vary, but the fact is that most buyers are unable to complete the process satisfactorily because of the mistakes they make. Of these, buying the wrong business is perhaps the first mistake prospective entrepreneurs make.

Finding the right business

Before you find the right business, it is important to do some amount of research. The first part begins with you. Why do you want to buy a business? Some people crave money, others want to flex their creative and innovative muscles; still others want to have more control over their own happiness. What is your motivation?

The ideal business will need to fit in nicely with your own skills, lifestyle and aspirations. Some important considerations that you must weigh include:

Ø      Your skills: what skills can you leverage to achieve maximum success

Ø      Your financial assessment: how much money are you willing to invest

Ø      Your role: will you be running the business yourself or hiring others to do the day-to-day work

Ø      Your expectations: how much profit are you targeting

Ø      Your commitment: can you make the personal sacrifices your business demands

Ø      Your personality: does the business suite your temperament, personality and comfort level

Ø      Your business area: what could be the spread of your business location

Ø      Your values: does the business coincide with your own moral value system

Ø      Your support structure: will your family and the people around you support you in the business.

The above questions will help you narrow in on certain aspects that you definitely want in your prospective business. It will also eliminate a good number of choices, thus making sense of the alternatives that may have seemed overwhelming at the beginning.

Next, it is time to move on to the business entity itself. There are two important considerations:

Ø      The business structure, and

Ø      The exit strategy

Business structures in Australia

Before you buy a business in Australia, it is important to understand the legal structure of the business you intend to buy. Your main choices include:

Sole trader: This is the most straightforward business structure. Here, the business is synonymous with the owner. This structure is ideal for simple businesses.

Advantages:

Ø      Less stringent reporting required

Ø      Owner entitled to profits and ownership of assets

Ø      Owner can subtract tax losses from personal income

On the flip side, the owner is held personally liable for all debts. Thus personal property is vulnerable to business liabilities. Also, you may find it difficult to exit the business at a later point of time.

Partnership: The term is self explanatory. Two or more people share the business, dividing profits and losses between them. Advantages are pooling of resources, expertise and skills. But the biggest risk in unlimited liability.

Company: This is a unit that has a legal entity separate from the owner’s. Advantages are that the company has a separate entity, so ownership of property in the name of the company is permitted. A company may be owned and operated by a single shareholder, if needed. The disadvantage comes when you want to exit the business.

The business structure of the business you buy will have a strong impact on your expected income and profits. So, consider this carefully before you buy. Consult a lawyer to determine the implicit details of the business structure you are buying.

Buying a franchise

Franchised businesses are very much a part of Australia’s economy. Statistics show that there are close to 700 franchise systems in Australia, with more than 50,000 franchises employing a little over 6.5 million people. Whether you go to the town or the suburbs, shopping centers are full of franchised businesses. Little wonder that international experts call Australia the franchise capital of the world.

Franchising a business has several advantages. The franchisor has the product and an established system of doing business. The franchisee only needs to step in and take over the reins.

Even so, buying a franchise is no surefire path to success. There are some important points you need to consider before you buy a franchise:

Ø      Is the Franchise a successful one? Obtain information about principal directors and their business backgrounds.

Ø      Even though the Franchisor provides training programs, the onus still rests on you. Hands-on management is still the best way to run a franchise. And don’t fall for the 40-hour week myth. You will be looking at 50, 60 or 70 hour weeks, particularly at the beginning.

Ø      Visit www.franchise.org.au to get a listing of the types of franchises available today. Which ones will you enjoy? Pick one where you can work for 5 years happily, which is half the contract time of the agreement.

Ø      When you are a franchisee, you have no option but to follow the franchise systems and products. Can you do it?

Ø      Under Australia’s Franchise Code of Conduct, franchisors submit a Disclosure Document which contains all the important pieces of information. This is a vital agreement and it governs your relationship with the Franchisor. Read it carefully and discuss the same with a solicitor.

Buying a successful franchise is not a guarantee to success. But by evaluating the franchise and your expertise, you can increase your chances of success significantly.

The Exit strategy

Another important but oft-overlooked consideration while buying any business is the exit strategy. Before deciding on the right business, you must also know the market for your business. At the end of the day, every businessperson has to realize that they are grooming their business for the ultimate sale.

You may not know who exactly may buy your business, but you need to know whether other businesses may be willing to buy your business. That way you can exit at a time of your choosing and make maximum business profits from selling your business. How well your business does when you put it up for sale depends largely on how expandable your business is.

Prospective buyers will not want to buy a business that requires specialized knowledge (which only you may have) or offers limited profits. That is why it is important to choose a business that will continue to grow in the years to come. Growth potential is vital.

Remember what Warren Buffet said: you’re better off buying a great company at a fair price rather than a fair company at a great price! When you are ready to close shop, yours must be that great company. So, your exit strategy must be a part of your business start-up plan.

Running a business may sound easy, but it is far from being a piece of cake. There will be challenges round the clock. You will need to deal with a range of personalities, fulfill many responsibilities, handle employees, schedule work and deliverables, maintain inventory … and the list goes on. It is important to have a realistic awareness of the hardships involved. Too often, new business owners are caught up in the rosy picture of reaping huge profits and establishing a reputation. They forget the hard work that precedes all this. Don’t let that happen to you.

A hands-on business owner must seek complete synergy in terms of what they offer the business and what the business can offer in return. The aim is not just to run the business successfully, but to enjoy running it for years to come.

Once you sift through the above considerations, you can see that while you are still left with a good range of choices, you have narrowed down your choice to businesses that most interest you. Now that you know how to choose the right business, you are ready to buy one. But, where can you find the right business for sale? That’s where market research comes into play.

How to find a business

Local newspapers are the first resource people turn to. These carry ads featuring businesses on sale. Unfortunately, many good businesses on sale do not like to advertise because of the business owner’s concern that such news could hurt their business. Alternatively, you could put in your own ads stating the kind of business you are looking for. Press directories at your local library will have contact details of most newspapers, journals and magazines. By advertising your intention to buy, you may be able to find better business opportunities before these open to the general market, and thereby a better price.

Trade Journals are another valuable resource. [please insert examples of Australian trade journals here]

Online magazines (most magazines own their own websites now) that specialize in buying and selling businesses contain specific information on certain kinds of businesses. Some examples include The Business Sales Catalogue Magazine and Australian Business for Sale. The Wealth Creator is Australia’s #1 business magazine and it is full of interviews with leading entrepreneurs, success stories and effective tips.

Industry newsletters also have specific information on businesses on sale. Local brokers maintain newsletters that they publish from time to time. Also, regional and national publishers combine listings across specific markets and come out with newsletters targeted at specific areas.

The Internet is a great place to start your search for a business on sale. You will find several websites with search listings on businesses for sale. Most websites have separate categories for different kinds of businesses making it easy for you to find the specific niche you desire.

Experienced business brokers, corporate financiers and transfer agents generally have the inside scoop on businesses for sale. You may search for business brokers on the internet. They can assist you in finding the right business and put you in touch with possible sources of finance. However, exercise caution when you look for a business broker. Make sure that they have the necessary qualification and experience.

Finally, do not overlook the power of word of mouth. Drop a word among business associates and trade contacts. Visit business exhibitions and conferences.

If information on the business you want to buy is not available with any of these sources, do not hesitate to approach the business owner. But first, do some due diligence. Also, make sure that you approach the business owner through a transfer agent because an unsolicited approach may catch the vendor unawares. If the business is not obviously for sale, a business broker may be able to help.

In closing:

So far, you have learnt how to pick the right business and where to find such a business. The next step in the buying process is full of high drama and hard decisions. Putting the right value on the business is the first stage of the actual business transaction between you, the business owner and the business broker (if there is one).  The entire negotiation and the deal itself depend on your ability to value your business accurately.

The next chapter in this book will prepare you for this seemingly arduous task.

Purchase research

Buying a business that is doing well is the shortest route to successful entrepreneurship. You already know that. But there is a flip side to buying a business – the purchase price.

When you buy a business, you will be paying for several things. There is the cost of the inventory, business space, any machines and gadgets that come with the business. Besides that, there is one component that you cannot really put a price on. You will be paying the seller for the goodwill of the business. 

Payment of goodwill is viewed differently by different buyers. If you are a novice and desire to go into an established business with a solid sales history, payment of goodwill is worth it. But for people who already have the necessary expertise in their chosen field, payment of goodwill may seem like a colossal waste of money.

The right split between the asset and goodwill price makes the right cost price. This split is crucial, both at the time of buying the business as well as when it is time for you to sell the business. If the split between the two leans too much in favor of the seller, you could end up paying huge amounts as taxes when you are ready to exit. Striking a fair price for your purchase is possible if you have an understanding on how to value the business you will be buying.

Valuing the business

Buyers and sellers are naturally aligned at the opposite ends of the sale process. While buyers want to shell out as little as possible, sellers bargain hard for the highest possible price. Unfortunately, the broker will also work hard to push the price up, because they get a percentage of the total sale price. Given the dynamics of this equation, a prospective buyer has to consider a number of factors before they can put a value on the business that comes close to its real value.

Some important considerations for valuing a business:

Type of business: Some businesses are considered to be safer than others. Such businesses will be valued higher. For example, a franchise business has the security of an established success formula, the franchisor’s support, training and ready clientele. Besides, it is easier to get finance for a relatively safe operation.

Asset base: Compare a service based industry with a very low asset base and an engineering concern with a huge asset base. Both generate the same profits, but which one would cost more? A business with a higher asset base is valued higher than the business with a low asset base.

Number of work hours: Long trading hours and more number of working days is a definite dampener. People are always willing to pay more for something that needs less hard work but pays more!

Cost of premises: What if you were to busy a business only to discover that your lease is running out the next month? It’s as they say, “If there’s no lease, there’s no business.” Some businesses (a garden cleaning service, for instance) do not need a physical address. Even if they have one, it is easy to move when their lease lapses. But, if the physical address matters (as is the case with most businesses), a reasonable lease on the premises increases the value of the business. High rentals generally bring down the value of a business significantly.

Liquidation value: This is the value that the business would fetch if it is liquidated tomorrow. So, this value reflects the current market price of all of the assets of the business. This is the floor price of the business and it is in your interest to know the rate difference between the floor price and the actual sale value. No seller would ever sell a business for its floor price, unless they are desperate to sell for some reason. 

Return on Investment: Clearly, high ROI is what every buyer wants. Healthy gross margins as well as good levels of profits reduce the risk factor associated with the business, thus bringing its value up. Calculate profits by subtracting running costs including finance costs and your own salary. If the business can recoup the investment faster, it becomes pricier than a business that takes longer to bring in returns.

Intangible assets: These are assets that may not appear in the balance sheet but are of great value to the business. Good people manning key areas, a strong brand name, an important license, patents, intellectual property or unshakable client loyalty have a great impact on the value of a company.

Ø      Goodwill: This is an intangible asset that is the net total of the reputation, recognition and customer base of the company. Goodwill deserves special attention because it plays a significant role in the structuring of your deal and finalizing of the value of the business. Many sellers price their business over and above the asset value of the business. This is because they have factored in the goodwill quotient of the business.

 

Security: The lower the risk factor, the more likely that the business will run successfully and bring in good profits. Such businesses are costlier than those that are more exposed to risks. A well managed working capital, quality customer base, proven business track record and a strong balance sheet adds value to the business.

Outstanding debts: Any bad debt has dire implications on the cash flow and working capital of the company. So, if, for instance, a good percentage of a company’s turnover involves credit sales, the buyer will have to take a close look at a potential bad debt situation and price the business accordingly. 

Finance: If the seller is willing to offer easier terms such as low down-payment or an option to pay in installments from the profit generated by the business, more number of buyers would join the fray. This brings up the price of the business. 

External physical factors: External factors that may affect the profits of the business adversely bring down the cost of the business. For example, a huge shopping mall in the immediate vicinity of a takeaway restaurant, a diversion in roads or change in technology may stem the flow of customers to the business.

Site visit: Never consider buying a business without conducting a site visit. You can assess the true nature of the business when you visit the business premises, talk to employees and see business being carried out. At this time, you can ask the owner some key questions regarding the functioning of the business. By spending time at the site, you get an opportunity to watch the ongoing operations, evaluate services and talk to employees and customers.

Some myths to avoid while valuing a business:

Don’t get caught in the comparison game. Just because business A was sold in a neighboring locality for X amount, business B need not fetch the same price. This valuation theory may be the best way to arrive at the price of a home, but not of a business. Every business has a unique economic environment within which it operates. So, when two businesses are put in the market, their sale price will vary with changes in rent, volume of business and other factors. Besides, it is almost impossible to get the dollar value of business sale because this is not made public. So, the basic information that you need to make the comparison is unavailable.

Resorting to turnover multipliers to estimate the cost of a business is a flawed practice, even though many people still use it. Two businesses with similar turnovers need not show the same profits. Other factors like working expenses and quality of personnel have an important bearing on the company’s expenses.

Valuing the business based on the value of its fixed assets is another mistake. For example, the price of a machine shop is not the sum total of the price of its drills, lathes and milling machines. If a business does not make enough profits, tangible assets are of little value.

Never take the book value for granted. This value does not reflect the true worth of the business. Many companies offer a discount on the book value. That is in itself a pointer to the fact that the book value is nothing but hot air.

At the end of the day, an experienced buyer knows that the selling price of any business is based on two factors:

Ø      Its present value, and

Ø      Its growth potential (future earnings) based on current earnings.

This method is called the income-based method of calculation. An income based calculation is more significant for the buyer than the asset based approach. It is true that the asset based approach accounts for all the assets of the company. But, it does not take into account the ability (or lack) of the assets to make money for the owner. For instance, the aging printing machine that lies unused in a corner may be listed as an asset in the balance sheet. But, when compared to the useful pieces of machinery, this item does not make money for the business.

An income based valuation system takes into account all those assets that contribute to the cash flow of the business.

For example, suppose you had an engineering company that several hundred thousands in hard assets but less than $5,000 every month as owner earnings on the one hand and a small gardening service with very little by way of assets but generating a healthy cash flow of $10,000 per month, which would you rather buy? A healthy cash flow is what every buyer wants.

A price in the range of 2-4 times cash flow (before tax, interest and depreciation) is a fair price. Many businesses are priced using this as an indicator of price.

One of the best ways to arrive at the right numbers is research. If you are buying a business in an industry, talk with people who have conducted business in that industry. Brokers who have sold along similar lines are a great help. This is the best way to find the best going value for a particular business.

Due diligence

Due diligence simply means background check. This is the process in which the buyer makes sure that they have all the necessary information to move forward with the transaction. Since there are grave concerns regarding confidentiality and possible disruption of business, in depth due diligence may be carried out only after a formal agreement has been signed. But, a basic degree of analysis and exploration regarding the business begins the moment a buyer has identified a business they would like to buy.

In general, there are three types of due diligence that prospective buyers need to do:

1.    Legal due diligence

2.    Financial due diligence

3.    Commercial due diligence

Some of the important areas you will be covering in the process of your investigation pertain to major orders and contracts, employment terms, technological concerns, environmental issues, any outstanding litigation, customer service, marketing and research and development.

As you can see, due diligence is not just about finance and accounts. This is the time when the buyer may discover that business earnings are not as represented or that the lease is running out. At the end of this process, the buyer will have a crystal clear understanding of the business they are getting into, what changes they need to make, how much money is involved and if this is the right business for you.

This is the slowest and probably the most unexciting part of buying a business. It is also ridden with delays; and delays, as many people know, ruin deals. A whole lot of time is required to collect all the materials needed for review. The possibility of disagreements may slow down the process further. Too many delays can stop the transaction altogether.

While there is no fixed period for due diligence, most small businesses take about three to five weeks to conduct their investigation. As the buyer, you have to read all documents yourself and make a list of queries and get these answered when meeting with professionals.

Diligent research is important, but it is also important to know when to stop research and start taking concrete action. According to many experienced brokers, aggressive people are the ones who ultimate buy the business they want. That is because every time you come across a business that is worth buying, there is only a small window of opportunity open to you. Spending too much time on ferreting out information will leave you with a good amount of information, but no business. Smarter, quicker folks would have already closed the deal.

The role of professionals in the buying process:

The process of buying a business involves precise legal documentation and a detailed study of the company’s accounts. The buyer’s accountant will present a rosy picture. It is up to you to unearth vital facts. Therefore, it is recommended that you seek the services of a solicitor and accountant before completing the business transfer.

You’re about to select a critical and costly resource. Do not be put off by the cost of these services because pinching pennies now could have dire consequences later on.

Before you select the right person, get recommendations from trusted banks, business friends and advisors. So, hold an interview and see that the professional has the necessary expertise and experience. Remember that you are in the last legs of finalizing the deal and there will be no going back after you sign on the dotted line.

Sources of information: You are allowed the freedom to dig deeply and use all available documents. Some of the important records you will have to look up pertain to:

Financial statements and tax returns:

Ø      Audited financial statements of three years together with the Audit reports

Ø      Recent unaudited statements

Ø      The company’s credit report

Ø      A list of inventory

Ø      A schedule of contingent liabilities

Ø      A schedule of accounts receivable and payable

Ø      A description of any changes in accounting methods in recent years

Ø      A report on expenses (fixed and variable)

Ø      The general ledger of the company

Ø      A report on gross margins of the company

Assets:

Ø      Physical assets

Ø      Leased assets

Ø      Real estate

Ø      Intellectual property

Ø      Licenses

Ø      Permits

Ø      Lease settlements

Ø      Operating manuals

Employee information:

Ø      A detailed listing of all employees and employee problems

Ø      A description of employee benefits, insurance policies and self-funded arrangements

Ø      Compensation claim histories

Ø      Description of retirement plans

Environmental issues:

Ø      List of hazardous substances used, if any

Ø      Disposal methods followed by the company

Ø      Environmental permits and licenses

Ø      A description of environmental litigation and investigation

Ø      Other environmental obligations

Taxes:

Ø      State, local and foreign tax returns

Ø      Any reports by the audit and revenue agencies

Ø      Tax settlement documents

Ø      Tax liens

Litigation:

Ø      A list of pending litigation

Ø      Any threatened litigation

Ø      Documents pertaining to settlements, injunctions or decrees

Ø      Unsatisfied judgments

To avoid undue delays, it is a good idea for the seller to include this list of documents in their offer. Specifying exactly what documents you will need helps you move forward without any deal-killing delays.

While checking records and any physical assets, feel free to have a professional run a thorough check of everything.  When checking pieces of equipment, see whether all fixtures, machinery and fittings needed to run the business are included in the transfer. After that, it is important to check the condition of the assets. Run a check on the recent service records.

One of the most important sources for valuable information is the seller himself.

Important questions to ask the seller

The important thing to remember when buying a business is not to rush the process or feel pressured to buy. As the buyer, you are entitled to ask as many questions as you want and find all the answers that will make you feel comfortable as a buyer. The answers are important because they hold clues that decide the future and profit of your business.

Ø      Why is the business put up for sale?

Ø      What direction is the business moving in?

Ø      Who else knows of the sale? (Confidentiality is a key element when you are transferring a business because suppliers, clients and customers tend to fret when there is a change. So disruption should be kept to a minimum)

Ø      Who are the key customers of the business and how dependent is the business on these key customers?

Ø      What is the projected value of the stock?

Ø      What is the expected value of assets (after current levels of depreciation)?

Ø      Who, if any, are the key suppliers of the business? Will they continue their support after the business changes hands?

Ø      What are the fixed costs of the business?

Ø      Any particular employee issues?

Ø      What external changes, if any, have taken place that will have an impact on the business? (Drop in demand, market shifts, increased maintenance costs, key personnel leaving, expiry of patent, expiry of sales agreement)

Ø      What kind of ownership transition does the buyer foresee?

Ø      What factors have led to the success of the business in the past?

Ø      Who are the biggest competitors of the business?

Ø      What can be done to increase profits?

Ø      What will the seller do after selling the business?

Ø      What is the time schedule for completing the sale of the business?

After you receive the answers, do some digging of your own to verify that the buyer is not hiding anything. Research the local area and speak to local businesses. This is a great way to find out more while keeping an eye on the business that is on sale.

Negotiating the deal

The following section aims to teach you the secrets of how not to get run over at the negotiating table. As mentioned earlier, the two parties at the negotiating table are natural adversaries. The buyer wants the maximum money he can get while the seller wants to pay the least he can get away with. How much money changes hands ultimately depends on the negotiation skills of both the parties. Approach this part of the process with an open mind. Remember that your strategy will evolve as you negotiate. So, do not go in with a ‘take it or leave it’ attitude.

The most important thing to remember in this scenario is that terms of the deal have changed significantly in the last two years. For one thing, bank financing is not that easy any more. Without bank financing, seller-financed deals are the only option.

Secondly, the financial downturn has also influenced the structure of many deals. Revenue and profits are on the decline. Though the seller will do his best to convince you that the negative trend is a temporary phenomenon (that’s what they all say anyways), as the buyer, you really cannot know if the decline will get steeper.  The events of the most recent past act as a guide to help you estimate what the immediate future will hold. Bring this to bear on the negotiating table. Most sellers base their price on past information when the business was doing well. To their mind, the purchase price must mirror past levels. But if the business is on a decline, the buyer cannot pay the asking price.

So, how should you go about negotiating the deal?

In such cases, you must prepare your deal based on ‘earn-outs’. These are future events that should, in all probability, unfold. When these events unfold, the buyer gets his due percentage. For instance, suppose you approximate the cost of the business at $50,000. But 40% of the profits are tied to a single customer. So, the offer will be to pay $30,000 upfront. The rest will be paid if the customer’s volume remains stable in the coming year. Similarly, suppose sales has declined by 25%, structure the deal so that you have to pay a part of the selling price upon sales returning to prior levels.

As you can see, each scenario is unique. Preparation is the edifice on which you build your negotiation. On an average, a purchase agreements will have over 30-50 individual clauses. Think about all the points that need to be negotiated. Also, plan in advance regarding what the buyer might put on the table and how you should counter it. Table your offer after you have thought everything through.

Tabling the offer

This is the first step, and the most important thing to keep in mind is that you are tabling YOUR offer. You may or may not have all the facts of the business in front of you before you make the offer. The terms you offer must be within your comfort level. You do not have to match your offer with the asking price. Instead, use the asking price as a guideline. At the same time, do not put forth a ridiculous offer. To a great extent, your initial offer must be a tool that will encourage the seller to reveal his hand.

You may have to refine your offer depending on what comes to light at the negotiating table. But there are no hard and fast rules about the terms of your offer. If you are an excellent negotiator, you must make an effort to get concessions. So, whenever you agree to some terms, get something in return. Never put up unlimited offers though, even while you want to give some concessions.

Case studies:

Case 1:

A seller wants $2,000,000. His price is based on the auditor’s estimated value.

The buyer paid the entire amount upfront after carrying out a limited due diligence. But, the business started showing signs of trouble in 3 months. The seller could not be traced and the business went bust in 8 months.

[The auditor’s value is only a guideline, not the actual price. Never accept this figure upfront. Carry out a full fledged due diligence and negotiate the value. It is always a good idea to pay the price in installments and to retain the interest of the seller even after the handover. In some cases, interest may have to be paid on the installments, but only if the seller asks for it.]

Case2:

The seller fixed the price at $1,500,000 after the auditor advised a selling price of $1,000,000.

The buyer started negotiating at 800,000 and the deal was eventually made at $1,050,000. The terms of the deal needed the payment to be made in 2 installments. Interest would be paid on the second installment and the seller was to remain for a period of three months, during which time he would be paid a salary.

[The seller got more than the auditor’s value because he started high and ultimately he was the better negotiator. However, paying the money in installments and retaining the services of the seller made transition much easier.]

Points to remember while fixing a price:

Ø      The better negotiator always wins.

Ø      The seller wants to exit with little to no risk, but the buyer must ensure that the business survives after changing hands.

Ø      Every business will have some skeletons in the cupboard. Look for them.

Ø      If you pay too much for the business, chances of its survival are remote.

Ø      Walk away if you are not happy with the terms of the sale.

Tax Issues

When you buy a business, attention must be paid to possible tax issues. Some steps can help you, the buyer, to slash taxes. Knowing what to do beforehand helps you negotiate the best deal.

The purchase price of the business, once agreed upon, must be allocated in the sale and purchase agreement so as to fetch the buyer the maximum benefit.

Some ways to do this:

-         Highest value on assets to claim maximum depreciation and the highest tax deduction. The buyer might bargain to keep this value at its lowest so he is not taxed for depreciation recovered.

-         Goodwill must be valued at the lowest possible amount because it increases assets allocation.

-         Get a higher valuation for stock since you are taxed on the stock profit.

-         The premium for lease is tax deductible. Do not forget to put it on the agreement.

-         If the seller is staying on and you are paying them a salary, lower the price of the sale. Increase the wages instead because this amount is tax deductible.

-         If/when you pay off the outstanding balance on the purchase price, increase the interest rate and reduce the price.

What is really good about buying a business in Australia is that regardless of the business structure, tax issues are quite similar. That said, most businesses may hide some tax land mines. As a buyer, you need to worry about undisclosed debts and unpaid taxes. Overvalued inventory, potential or pending lawsuits, sour employee relations are matters that need attention. If you are not careful, you may have to face potential audits and bills even for a period that was years before you took over. This is why a good attorney on the team will help a business acquisition immensely.

Closing the deal

This might seem like the easiest part of the process. But, this stage is fraught with risks. Even though both the parties have reached an agreement on the price, remember that the deal is far from closed. To close the deal conclusively, certain conditions have to be met within a prescribed time limit, failing which, the deal becomes invalid. Called the ‘Conditions of Sale’, these agreements include:

-         Assessment and verification of financial statements

-         Transfer of lease, contracts and licenses

-         Obtaining and transfer of finance

It is important to conduct a tax lien search. Filing of tax returns and tax transfers must be conducted speedily. Make sure that the company assets you buy are free of tax burdens. In case there is a need for the transfer of bulk sales tax, your attorney should determine the fee for this beforehand.

Transferring a lease has the potential to become a landmine if the agreement brings the landlord into the deal and the landlord wishes to revise terms. In any case, make sure that you are on top of the situation so that the landlord cannot throw a monkey wrench in the works. The process becomes somewhat easier if you are buying the property as the cost is factored into the selling price.

A non-compete cooperation agreement between the seller and buyer ensures that the seller does not turn around and try to oust you after making a pot of money selling his existing business. This agreement prevents the seller from being the owner, partner, investor, consultant or employee of any organization that may pose as a competitor.

Purchase price allocation is another important part of the agreement and the document lays down how the assets from the purchase are allocated. This helps both parties; the seller for tax purposes and the buyer for allocating funds for depreciation, tax computation and expenditure. In almost all cases, a qualified accountant takes care of the details.

An important part of the process is financing the purchase. This will be dealt with in the next section. However, in case the full amount for the purchase is not paid, shares may be held in escrow. Keep your eyes open to all these possibilities.

The bill of sale is the ultimate proof that transfers ownership of the business. Once this is signed, you can take a moment to sit back and relax. Congratulations! You are a new business owner.

A checklist of documents when closing the deal:

Ø      Promissory note if the seller is financing part of the sale

Ø      Security agreement that lists the assets to be used as security for the loan

Ø      Lease agreement

Ø      Finance statements

Ø      Transfer documents of any vehicles that are changing hands

Ø      Copyright, patents, licenses, trademarks

Ø      Franchise documents, if needed

Ø      Not-to-compete agreement

Ø      Settlement sheet

Ø      Employment or consultation agreement, if needed

Money Matters: Arranging Finance

Purchasing a successful and profitable company is a highly competitive process. Often, immediate availability of money is what differentiates the winning buyer from the rest of the pack. So, if you do not have the funds to compete, you are quickly relegated to the sidelines.

As soon as you are ready to move ahead with the deal, you will need to assess your financial position. In most cases, you may need to borrow money. A financial broker will help you put together a finance plan. However, brokers do charge a fee but they make the process easy and smooth.

In any case, funding a business purchase is one of the major concerns you face when you are ready to move ahead. The current global recession has made the problem more acute. Let us take a quick look at what traditional sources of financing are open to you at a glance.

Traditional financing sources:

Ø      Personal funds

Ø      Banks

Ø      Government sources (Small Business Investment Company, City or State Programs)

Ø      Asset based lenders

Ø      Private investors

Ø      Leasing companies

Ø      Insurance

Ø      Suppliers who extend credit

Ø      Barter (your services against a service/product that you require)

Ø      Contract Sales

Ø      Customer financing (advanced payments or membership financing)

Each type of lender has a unique criterion for investment, which would be calculated based on a number of factors like the creditworthiness of the business, its cash flow and the availability of assets as security. The interest rates and payment schedules vary based on these factors.

An intelligent consumer needs to shop around for the right lender. The right lender could be a single entity or a combination of lenders. Terms too will vary subject to your financial requirements. If you have enough cash, you may look for a financing option that charges the lowest rate of interest. However, if you are strapped for cash and require a good portion of the money on loan, then, you will have to compromise on the terms of available financing.

Buying your own business is an extremely costly affair. How you finance it will impact the success of the business to a great extent. Financing options from external sources generally attract very high payment terms and these directly influence your ability to take risks. Paying a high interest is a major cost to the business. That is the reason why every potential buyer must start off by exploring cheap sources of financing like personal funds and seller financing.

Personal funds:

Ø      Cash savings and liquid paper investments.

Ø      Negotiate a private party loan from a family member or a friend.

Ø      Take a bank loan on personal assets like a car or house.

Ø      Barter equity positions in your personal assets for exchange of business assets

Ø      Negotiate a payment delay with the buyer if there are any outstanding bills

Ø      Take advances from credit cards or negotiate a delay in current payments so you can make this payment

Credit card financing:

Tapping into your credit card for down payment is a quick way of getting things moving as there are no delays due to cumbersome approval processes. So, if you have enough credit, this is a great option. The downside, however, is that if you are depending on an SBA (Small Business Administration) loan to finance the rest of the deal, you will face problems if you use credit card payments to finance the down payment.

Alternatively, you could think of taking on partners. You have a number of choices here:

Ø      Ask the buyer to become a minority partner in the deal

Ø      Sell the shares of the company to a new partner

Ø      Sell shares of the company to employees/suppliers/other business buyers

Home equity loans:

A buyer can utilize these funds to make a down payment or to buy the business. When rates are low, lenders are quite prepared and happy to give out home equity loans. A great advantage of home equity is that the loan is sanctioned pretty quickly, though you must take care to get the ball moving as soon as possible.

Retirement plan financing:

If you have a sizeable amount parked in your retirement funds, there is a wonderful way to make use of this money to buy a business. Put the money in a trust that buys the business from you. This way, you will not attract taxes.

Seller financing:

A seller financed business purchase is quite popular these days because an intelligent seller realizes that the current economy leaves little by way of choice. In the present climate, even genuine buyers face serious financing difficulties. In such cases, seller financing may be the only viable option for purchase. Commonly, the buyer may put down anywhere between 25%-50% of the money and the owner will carry a note for the rest for a period of time (2-10 years).

A seller financed purchase makes it easy for you to secure funds. The proposition is attractive to the seller as he has the freedom to lay down terms that are ultimately beneficial to him. Add to this the benefits of tax incentives, and the seller may find himself attracted by the possibilities that open up.

A seller financed purchase has important advantages besides the cost factor, as far as the buyer is concerned. When the seller’s interests are at stake, the seller may go the extra mile to make the business a success even after handing it over to you. The seller’s willingness to finance the deal also shows their trust in the long term success of the business.

Some of the questions that the buyer should consider when negotiating financing with the seller are:

Ø      The total amount of cash the seller is demanding upfront

Ø      The seller’s need for cash

Ø      The seller’s willingness to have debt service payments depending on future profits

Ø      Any personal guarantees demanded by the seller

Ø      The seller’s willingness to structure the financing in such a way as to provide maximum tax benefits to the buyer

Ø      The seller’s tax obligations and the impact of these considerations on the structure of the deal

In some cases, the seller may ask for rates that are higher than the going rates. It is important to remember that you should not agree to the seller’s terms without proper consideration. Repayments should be affordable and interest rates must be reasonable. A business broker may be of service in case you need to negotiate terms with the seller.

Debt financing:

If you cannot raise the money yourself or cannot get seller financing, you may need to consider other options for financing your business purchase.

Debt financing is a broad term that refers to borrowing money from a source other than the company. There will be terms and conditions to be met.

Debt financing has a number of advantages:

Ø      Debt is cheaper than equity

Ø      Debts are relatively simple to raise and is available with a wide variety of choices

Ø      Debts are easy to pay back because most of them come with regular payment schedules

However, debt financing also has its share of disadvantages. For one thing, the very structure of debt financing may prove to be a stumbling block for the business in the long term. For instance, paying some amount towards the principal and the interest regularly may jeopardize future plans of expansion. Some creditors may even put up restrictions that directly impact the running of the business.

Therefore, before you approach debt financing, there are a number of questions that you need to ask yourself:

-         Debt or equity?

-         The availability of assets like machinery, land etc that may be placed as collateral for a loan

-         What are your options for obtaining debt financing (account receivables, equipment borrowing etc)?

-         Are there any existing financing resources that may be tapped?

-         How will you divide the cash flow between paying off debts and future expansion plans?

-         Can existing suppliers and customers be possible sources of finance?

-         What agencies of finance can you consider?

 There are a number of sources that you can turn to for debt financing. Some of them include:

-         Unsecured lenders

-         Small Business lenders

-         Accounts receivable

-         Inventory lenders

-         Factoring lenders

-         Leasing companies

Unsecured loans

Unsecured loans are provided by banks and financing companies and they base their finance on the amount of cash flow generated by the company. Banks generally base their assessment on a number of factors, like:

Ø      The amount and regularity of cash flow from the business

Ø      Available security

Ø      Net worth of the borrower

Ø      Creditworthiness of the borrowers

Ø      Financial background of the borrowers

Ø      Past history of the company

Ø      Future plans of the company

Unsecured loans are available to businesses:

-         That can generate a healthy cash flow

-         Have a desired debt service coverage ratio.

You can calculate the service coverage ratio by dividing the cash flow generated by debt service payments. For instance, if the business earns $100,000 as cash flow per year and their debt payments equal $65,000, the debt coverage ratio would be 1.6 approximately. Businesses that have a ratio of 1.25-2.5% are favored.

Lenders will run a credit check before they sanction loans. Each type of lender will have their own criteria for judging your creditworthiness. That said, lenders love to lend money to people who have a history of meeting their commitments on time.

Small Business Lenders:

The Small Business Administration (SBA) is a government agency that provides low interest, long term loans to small businesses. Getting a loan from the SBA is tough, but there are benefits that make the effort worth it.

The SBA loan is different because it places less of a burden on the borrower for other collateral and assets. The loan is expected to be paid back in small amounts and the time frame for repayment is long. Banks are more comfortable disbursing such loans because the SBA offers a guarantee of 80%. Certain fees are also waived in the case of SBA loans.

SBA loans are generally intended to finance a business that is steadily growing but is short on capital. SBA loans are not offered directly to the borrower. Financial institutions like banks offer SBA loans provided the business can show that the loan is applied to reaping long term success.

There are different kinds of SBA loans that you can avail in Australia:

Ø      Start up financing is offered by a number of banks in Australia. Loans raised thus may go towards financing tools, materials and equipment.

Ø      Business growth financing is a loan that is given out to established businesses that need cash impetus for further growth.

Ø      Inventory financing ensures that you have sufficient products to sell. This loan may be used to purchase necessary materials to increase production.

Ø      Equipment financing allows small businesses to buy or lease large pieces of equipment (small businesses are better off leasing such equipment rather than buying them outright).

Ø      Business property financing is provided by financial institutions that regularly deal with commercial spaces. These loans are quite flexible in terms.

Small business loan is the most popular way for small businesses to raise finance. However, before you apply for an SBA loan, it is important to remember that the SBA is not an authority that is into funding businesses. The agency participates in the process to make finances available to borrowers in a manner that is easier and more comfortable.

You can improve your chances of getting the loan by approaching the lender with the right kind of information:

Ø      The name, address and nature of the business validated by supporting documents and Tax File numbers

Ø      Name and address of the principals along with sufficient background information

Ø      The purpose of the loan

Ø      The amount required

Ø      The legal structure of the business

Ø      Necessary financial information (P&L statements, balance sheets etc)

Ø      A detailed business plan that states how the amount will be repaid along with projected figures

Ø      Details of assets that you can place as security

Ø      Necessary financial statements of three years preceding the purchase

A good history with a lender or with the bank should make things infinitely easier.

How you present your loan proposal is important.

Ø      Take the time to polish your presentation skills.

Ø      Come up with possible objections that the lender may have and arm yourself with answers for the same.

Ø      A description of the business should be included. This will contain details like current assets, the number of employees, age of the business and how the business performs and competes in the marketplace.

Ø      The lender wants to be assured that they are making a good investment. So, it pays to outline what your future plans are, how the company caters to its customers and how the funding can help the company grow.

Ø      Any additional security that you can offer against your personal assets or against the company’s assets may add weight to your proposal and increase your chances of securing the loan. However, it is better to keep this information confidential until such a time when you need to negotiate. That way, you should be able to raise maximum money from the loan without damaging your own interests.

Factoring lenders:

These are lenders who purchase the account receivables from a company on a periodic basis. They purchase directly from the customers and the company’s invoice will make it clear that all payments are to be made by the customer directly to the lender.

A factor is generally more liberal in their terms when extending credit. This is because they have specific expertise in the collection of receivables and credit review. In fact, there are companies that regularly use the services of a factor, instead of setting up a credit department of their own. That way, the company can focus its attention on important matters like production, procurement and sales.

There are two ways in which you can acquire loans from a factor. In the first case, the loan is given against the total invoice (less a processing fee) a number of days after the invoice date. In the second option, the factor pays the business before the maturity date of the invoice. This is the kind of loan that is most suited for buying an under-capitalized business (a business that does not have sufficient cash for daily operations).

Equipment finance lenders:

Some companies advance a loan against the pieces of equipment in the company. Some companies may purchase the equipment and then lease it back to the company.

Equipment finance lenders are very much concerned with:

Ø      The financial worth of the borrower

Ø      Quality of the equipment

Ø      Saleability of the equipment

So, these lenders will look into the quality of the equipment. The best types of equipment that can fetch you good credit include:

Ø      Equipment that is not obsolete

Ø      Equipment in good physical condition

Ø      Equipments with good determinable value

Ø      Larger pieces of machinery are preferred to a number of small pieces

Equipment lenders will consider the cost of repossessing and liquidating the pieces of equipment, over and above other considerations.

As you can see, there is a wide variety of financing options available to you. It is up to you to sit down with a financial expert and draw up a financing structure that suits your needs and your business the most. Keep in mid that all lenders carry out a corporate credit check and a personal credit check. Be prepared to discuss any issues before they come to you with questions.

The following charts show the pros and cons of different lenders.

Chart Courtesy SmeToolkit.org

Chart Courtesy SmeToolkit.org

In addition to the above, some tips to raise quick money include:

-         Get a fresh loan from current business suppliers

-         Sell off or finance excess inventory

-         Sell off high value assets and high value equipment and lease them back

-         Speed up company receivables

-         Sell excess assets

-         Sell excess land or lease the same

-         Lease or sell parking space

-         Sell unused licenses and trademarks

-         Sell or lease the unused parts of your business premises

-         Sell obsolete inventory

You may also try to rearrange any business purchase arrangements that are still outstanding:

-         Try to defer down payment for as long as possible

-         If the buyer’s personal check is in escrow, negotiate a value for it.

-         If it helps, let the seller retain all receivables

-         Negotiate expanded payment terms with important suppliers

So, should you purchase the business outright if you have sufficient cash? It might seem like a straight yes, but many savvy businesspersons will tell you that this may not always be the case. At certain times, it makes sense to borrow. For instance, if the seller is willing to lend money at rates that are below market rates, seller financing is an excellent option. This way, you can give the seller a stake in the operation while paying him off within a set period of time.

The key to finding business financing in a timely manner is creative thinking. You have got to be aggressive and follow every possible source of funding so you can have the money ready on time.

Financing a business – A case study:

An engineering student wanted to purchase a small manufacturing company for $120,000. But the student was fresh out of college and had no funds that he could draw upon. Rather than let the opportunity go, the student decided to raise the money from lenders and pay them off as the company started making a profit.

The student proceeded to make a detailed business plan. After discussing the same with his family and friends, he was able to raise $52,000 as a personal loan. He was also able to get a business partner from his circle of friends. The business partner agreed to pitch in $50,000. He then secured a private loan of $20,000 at 18% interest from a financial institution.

As you can see, most buyers obtain finance from a number of sources. To decide upon the best financing options, the buyer must consider all his options and go for that option which will cost him the least, in terms of effort and interest rates. Time is also a crucial factor.

On any good business on offer, assume that there is more than one potential buyer. So, if things get bogged down, there will always be somebody else to get in line and pick up from where you let off. To be in the front-running, you need to keep the process moving smoothly. Keeping things going as per schedule is an important part of this.

Remember that 80% of people who plan to buy a business never reach the finish line. There are potential roadblocks every step of the way. Even when you are negotiating with the buyer on the terms of payment, any delay can cost you dearly. As they say, time kills deals. So, don’t sit on it.

Long before you buy the business, there is an important part of your asset base that should attract your notice and deep consideration: your work force. They are the edifice on which your business stands.

Certain regulations lay down what you must do to take care of your employees when you take over a business. Employees transfer their loyalty to you and as their employer you are responsible for their well being.

The next chapter throws more light on how you can have a mutually beneficial relationship with your employees. This ensures that continued growth and prosperity of your business under your care, guidance and leadership.

Taking care of your workforce

When you buy a business, your employees are one of your most important assets. There is no going forward without them. Besides, in most cases, it is in the interest of the business to retain the services of competent employees. They bring a wealth of experience and contacts with them, so taking care of your employees makes ample business and humanitarian sense.

As an employer in Australia, you have certain legal responsibilities towards your employees. If these responsibilities are ignored, you may find yourself entangled in legal issues.

Evaluating your employees

You would have met some of the key employees of your business at the time of due diligence and other investigations. However, the bulk of your employees will meet you for the first time after you take over. The uppermost thoughts in their minds at this time concern their jobs, potential changes in position, potential changes in company policies and the future of the business after the previous owner’s exit. For many people working in small businesses, the business is like a house. Once it is sold, all its occupants are expected to leave! So, rumors may be flying thick at the point of your entry.

The best way to clear all misunderstandings and rumors is to take matters into your own hands at the earliest possible time. Hold a meeting with your employees as soon as you can, so that there is no time for rumors to spread and people to panic.

At the time of your meeting with the employees, state your future plans for the company. Tell them explicitly that the business will continue to run along the same lines. At the same time, do not state explicitly that everyone may automatically keep their jobs. Before you accept everyone on your payroll, you need to evaluate your employees.

When you take over a new business, there may be reasons to initiate slight changes in the structure of the organization and in the responsibilities of the employees.

In many small businesses, some employees take up key responsibilities because there is no one else to do it, or because they happened to know something about it. The previous employer may have employed certain people without any background search or proper interview. In the course of your first month as the owner of the business, you must go through the records of each of your employees. You must also make it a point to interview your employees to ensure that they are suited for the positions they hold. You may even find out that some of your employees are happier in other positions. This is the time to reassess employee positions, if needed, and find out if your employees are happy doing what they do.

The interview process may look somewhat daunting, if you have never done this before. The best way is to consult a book on hiring. It pays to go about the interview process in a thorough and professional manner because you may not be able to revisit these decisions at a later point of time.

All the decisions you take must be in keeping with the culture and motto of the business. For example, you may notice that a particular employee has a flair for sales, but he is happy working in-house. In that case, you may axe his productivity and win general displeasure if you try to move him at once. Or you may notice that certain employees are unable to offer anything of value in a position. In that case, you may have to bide your time before moving the employee to another post. A policy of repositioning is more productive (at this stage) than firing and hiring.

One of your first responsibilities on the job is to bring an air of calm and confidence in the minds of your employees. Many employees look upon the transfer of power at the top to mean searching for a new job. Movies like “Wall Street” have somehow driven the message home that the ‘New Boss’ will not rest in peace until he has fired everyone on the pay roll. You need to let your employees know that the sale of the business is not a death knell for the business. Nor is it a cue that they find jobs elsewhere. Establishing faith and resilience in your employees is an important part of your responsibilities.

Other than the emotional welfare of your workforce, there are legal obligations to be taken care of.

Obligations and Entitlements

According to many experts, the high rate of failure in acquiring new business is often due to intangible issues like Human Resource Management. When the acquisition of a business includes the transfer of assets, issues of employee management have to be researched and settled well in advance.

When a business is bought, there is an obligation on the part of the buyer and seller regarding what should be done with the employees. Unlike in other countries, in Australia, when a business is bought, the employee cannot be unilaterally transferred to the new employer without the employee’s consent. If the buyer does not receive the employee’s consent, the transfer of employees amounts to termination or dismissal, which in turn raises issues of notice and payment in lieu of notice.

As the buyer, you need to examine all existing agreements and legislation regarding your employees so you get a full picture of your legal obligations. According to The Workplace Relations Act, 1996, certified agreements, awards and AWAs of the acquired company is transferred to the buyer. All information pertaining to employees need to be inspected at the time of due diligence and favorable conditions must be worked out when negotiating the deal. A thorough due diligence will leave you better informed about issues pertaining to your employees. 

The most important issues to be examined:

Ø      Nature of your workforce (whether they are award covered employees or not) and the number of employees in each category

Ø      Industrial instruments of relevance (state registration agreements, awards, certified agreements, contracts of employment etc)

Ø      History of industrial disputes

Ø      Existing arrangements with independent contractors

Ø      Occupational health and safety issues

Ø      Anti-discrimination and equal opportunity issues and documents relating to the same

Ø      Superannuation arrangements

Ø      WorkCover arrangements

Ø      Employee liabilities and entitlements(annual leave, long service leave, contingent liabilities, sick leave and redundancy benefits)

Terms and conditions of Employment:

As the new employer, you are held responsible for:

Ø      Outstanding disciplinary situations

Ø      Outstanding grievances

Ø      Ongoing lawsuits, claims

Ø      Collective agreements, including those that were taken when the transfer was taking place

You may be interested in retaining certain key employees who are necessary for running the business. You need to discuss these issues with the seller. Also, you need to decide whether the employees will be retained on existing terms and conditions of employment.

Before you take any decision regarding firing your staff, keep in mind that there are laws that govern such actions. Even if you feel that the business can run with fewer staff, acting upon this without proper guidance may see you in court facing the employment tribunal over a case of unfair dismissal or unfair redundancy.

In Australia, the Workplace Relations Act of 1996 contains employee laws pertaining to the state and territory. Industrial awards, contracts of employment and tribunal decisions are also contained here. Any changes to the terms and conditions of employment without proper legal guidance could be a breach of contract. In case of any changes, the employee can claim constructive dismissal.

Hiring also follows rules. For instance, if you want to hire a new employee, you have to provide a TFN declaration form to the employee that has to be completed and submitted within 28 days. There are rules regarding W1 and W2 payments too. All such legislations need to be followed stringently.

Record keeping is also an important part of your responsibilities and you may be called upon to explain all transactions, if needed.

Entitlements

In case the seller terminates any of the employees at the time of selling, the correct notice or payment in lieu of notice should be paid.

In addition to payment in lieu of notice, entitlements may also need to be paid. These entitlements may include annual leave loading and long service leave loading.

The buyer needs to learn about accrued costs and entitlements that is the result of past service. These entitlements and obligations vary according to the terms relating to the employment of each employee. You will be required to pay superannuation and fringe benefits, wherever applicable. When buying the business, you must pay particular attention to length of service of your employees. This is because the employee’s long service leave depends on the continued service of the employee.

When the buyer takes over the long service leave obligation of the employees, it is a common practice to factor future long service leave payment into the sale price of the business. Sometimes, the seller may agree to place some money in a trust fund that can be used by the new owner when the employee is to receive the entitlement. Whatever arrangements you make, keep in mind that the responsibility for such payments lies with you, the new buyer.

Insurance Requirements:

In Australia, business owners are required to maintain a worker’s compensation insurance, in addition to any business specific insurance. The worker’s compensation insurance provides coverage for employees in case of any workplace injury.

Visas and work permits:

In case there are foreign employees working on temporary visas, there are special rules applicable to such employees. For instance, if the employee wishes to change their employer, they will need a new sponsorship and visa application. The buyer will need to pay special attention to the status of any employees who do not hold an Australian citizenship.

General workplace conditions:

As the employer, you have to maintain minimum standards of pay and entitlements for your employees. The minimum wages are protected in the Australian Pay and Classification Scales. A list of Public Holidays is also available.

The law is particularly stringent when it comes to discrimination.  Anti-discrimination laws contain laws regarding Racial Discrimination, Sex Discrimination, Disability Discrimination and Human Rights and Equal Opportunity Commission Acts. Anti Discrimination laws are available for all states and territories. Some of these legislations may be similar and others may be unique. Employees who feel that they are being discriminated against apply to a State Tribunal or to the Human Rights Equal Opportunity Commission.

The owner of a business is expected to comply with the tax obligations of their employees. The status of your employees will decide their tax obligations. You will need to inspect records accordingly, register employees and withhold their wages to be paid to the Tax Office.

It is true that as the new employer, you will have to consider how the company has been managed thus far and makes changes that align the business with your future plans for the company. You may even have to structure pay packages so that employees are encouraged to contribute more. All your plans for the business can be carried out. Only, makes sure that you do it within the legal framework.

One of the best ways to avoid legal issues is to discuss changes with your employees. Employees are generally resistant to sudden changes that you make. This is more so if these changes entail more work on the part of the employees and brings little immediate benefit. However, even if it feels like your employees are ‘digging’ their feet in, they are stakeholders in your business.

A lot depends on how your employees respond to the changes you want. If they support you, then, your way forward is easier. However, if they oppose your suggestions, failure is inevitable. The fact that you are the ‘outsider’ doesn’t help matters. So, before you make any changes, it is vital that you have the full support of your employees.

Integrating yourself into the company and its existing flow is one of the most difficult issues you will face. You need to learn the workplace culture and adapt accordingly. Discuss changes with your employees. Ask for feedback and hold discussions. One of your important goals is to build consensus among your employees. If you are able to get your employees to assist you with whatever changes you have in mind, then, you reap many benefits at once. It instills confidence in your employees, makes them aware of your future plans and makes them feel as if they are an important part of the organization. It will evoke a team feeling that is worth its weight in gold.

Small business support networks

Small business support networks in Australia will give you sufficient information about buying a business. They can also provide you with valuable information or advice regarding the running of your business once you take over. Therefore, it is recommended that you join some of these support networks and participate in discussions/meetings actively.

Some examples of small business support networks in Australia:

Ø      BEC Australia

Ø      Aussie Innovation

Ø      Australian Women Online

Ø      OzSmallBiz

Ø      Young Entrepreneurs

Ø      The SB Hub

Ø      Aussie Tycoon

Many of these support networks have a strong online presence. The forums and discussion boards reveal more information on a number of issues that affects SMEs. It is a good idea to participate in these forums actively and gain as mush information as you can regarding buying and running a business Down Under.

Running your business

Finally, the honeymoon is over and you’re ready to make the business pay. The decisions you take on the first few days could probably be the factors that influence your business most significantly.

Your main aim at this point is to establish yourself as the new owner of the business. You need to get to know the business, your clients and all other factors that play an important role in the running of the business. As you learn more, you will certainly have many ideas for change. It’s true that you bring in a fresh perspective, but you still have not entrenched yourself in the business enough to identify problems that insiders know of. You may want to improve various aspects of the business. You may have the irresistible urge to make sweeping changes so that your goals and dreams are achieved immediately.

But, don’t act on this impulse. Resist it.

Assess the strengths of your company and identify problems. But, it is not the right time to act.

One of the biggest mistakes business buyers make is to let caution go to the winds. You may have identified the problems with your company at the time of due diligence, but you have a head start over your employees here. They may be unaware of this or may be unwilling to change. Give them some time. In the meanwhile, know the strength of your business first. This is more important that digging for its weaknesses. During the period of transition, only the inherent strengths of a business can keep it alive.

Make changes slowly and gradually. This will help you build on the strengths of your business. It will also encourage your employees to support you fully in your task. You will also be sending out positive messages to clients, distributors and other people associated with your business.

This is the easiest and shortest route to success.

Additional resources

The Australian Government website for business information

The Australian Government website for work issues

Australian Securities and Investments Commission (ASIC).

Australian Taxation Office

Australian Grants and Awards:

-         AusIndustry by the Australian Government

-         Government Dept. for Agriculture, fisheries and forestry

-         Government site for the Northern Territory

-         Small Business Development Corporation

Australian Trademarks

Franchisee business opportunities

CPA

Chartered Accountants in Australia