BUYING A SMALL BUSINESS- CIRCULAR NO.3

1.         TECHNICAL SIMPATICO

You should at least have some passing acquaintance with the technical content of the business.

An interest in “assembling the widgets” or at least an ability to learn and not be bored by the mechanical aspects of the business, is important to maintaining your passion for this project. 

2.            GOALS

You must look at (and we believe list), your goals for what you hope to get out of going into business, eg comfortable income, lifestyle, flexible hours, freedom, retirement income). 

*It is important to match these goals against any business you look at. Otherwise you will end up owning a business that will not get you where you want to go.  Why exchange one unsatisfying existence for another which you can’t quit and walk away from like your current job?

Your goals should never be far from your thoughts and should shape the tool which is your business.  If the tool isn’t getting you where you want to go, change and evolve it.

3.            PURCHASING A BUSINESS OR A COMPETITOR, MANAGEMENT AND THE BUSINESS.

You may have the opportunity to leave your current employer and purchase a competitor.  This can have great benefits given that your experience in the industry will be somewhat transferrable and that you will have good knowledge of your major competitor.  You should also have some idea of the details of the history of the business you are buying as you will have competed against it during your current employment.

There are additional issues to consider here however.  Firstly you may be restrained by your current employer and you will need to check if the restraint is binding, and then if you are likely to breach it. 

Secondly, you will need to ensure that you cannot be pursued for using your currently employers resources to prepare to compete with it in your final days of employment.  This is a breach of your fiduciary duty as an employee and is a very serious matter.  In a similar vein, you will need to be careful not to be able to be pursued for taking confidential information and documents with you.

Depending on the size of the business or your skill set you may think about taking in a partner.

Business partners can make a business fly.  A well chosen partner can provide a skill set that you are lacking, finance, talent or simply a sounding board which is all important.  Your business partnership can also ruin your business and your life.

There is one simple rule for business partnerships: never go into partnership with someone unless they bring something to the table which you don’t have and which is useful to the business.  All business partnerships fail when one partner fails to appreciate (rightly or wrongly and always utterly subjectively), the input or value of the other.  The root of this is often a lack of valuable input. Sometimes partners are taken in because they “were there at the time”, or were part of the initial planning.  This is not a good reason to do so.  Be clear about the skill sets required and who is in.  also be clear about what is required. Capital should be put in equally unless this is absolutely impossible, and if impossible this is an alarm bell.

Unravelling a business partnership is far more harrowing and expensive than a life partnership.  The parties to a divorce can physically separate, business partners usually cannot.  This means continuing to work together in very stressful times.  This can often kill the business and lose key staff.

4.            SIZE

The size of the business does provide you with some security but provides other challenges and problems.  A larger business should incorporate some infrastructure systems and procedures, and should have some embedded talent in its staff, which will provide you with some safety and security whilst you are learning the ropes.  Apart from the obvious budgetary issue (having to find more money to purchase the business), there are issues relating to volatility.  The larger the business, the greater the risk, and the more difficult to turn around long term trends and sliding income. 

5.            MARKET DYNAMICS

The useful life of a good idea these days is very short.  It is very important that you examine carefully, trends in the industry you intend to enter. 

Competition is fierce, the development of new income producing fields is hotly contested, and traditional ways of doing business in particular areas, go stale and become useless extremely quickly. 

A.                       If there is an industry association, speak to its President, attend its meetings, and find out the overall health of the industry, whether there is a market leader, and what your prospects of competing successfully in that industry really are. 

B.                       Look at overseas trends in your intended industry.  Successful systems, procedures and products in your target industry, can often be developed overseas, and do not reach our shores as quickly as you might think. 

It is important not to dive into a dying industry or a hyper-competitive market with small margins and cut-throat competitors, unless you either know that market intimately or you have an innovation that will give you an edge and you are very confident of it.  

STILL TO COME

 

1.                        WHAT BUSINESS TO BUY

2.                        VALUING THE BUSINESS

3.                        GOODWILL

4.                        FIXTURES, FITTINGS, PLANT AND EQUIPMENT

5.                        WORK IN PROGRESS AND DEBTORS

6.                        BUYING THE BUSINESS OR BUYING THE COMPANY

7.                        STARTING A BUSINESS FROM SCRATCH

8.                        GOING INTO COMPETITION WITH YOUR CURRENT EMPLOYER (COMPETITION CLAUSES AND RESTRAINT CLAUSES)

9.                        THE PURCHASING PROCESS

10.                     CONTRACT CONDITIONS

11.                     DUE DILIGENCE AND FINANCE CLAUSES

12.                     JOINT VENTURES AND EXPANSIONS

13.                     SYSTEMS, GROWTH AND FRANCHISES

14.                     HIRING AND FIRING

15.                     WHAT IS DISCRIMINATION?

16.                     WHAT IS SEXUAL HARASSMENT?

17.                     WHAT TO DO IF YOU ARE DISCRIMINATED AGAINST OR SEXUALLY HARASSED?

18.                     INDEX - ANTI-DISCRIMINATION ACT 1991

19.                     31.          APPENDIX - ITEM 2 – HARASSMENT COMPLAINT PROCEDURE

20.                     31.          WRONGFUL DISMISSAL – INDEX

21.                     32.          WRONGFUL DISMISSAL

22.                     33.          APPENDIX - CHECK LIST FOR DISMISSAL PROCESS

23.                     34.          Sample interview process - First or Second Interview

24.                     35.          FEEDBACK record book

25.                     36.          FIRST WARNING LETTER TO POOR PERFORMER

26.                     SECOND WARNING LETTER TO POOR PERFORMER

27.                     DEBT COLLECTION, CLIENT INDUCTION, CREDIT ASSESSMENT, COSTING YOUR PRODUCTS AND MARGINS

28.                     PRIVACY

29.                     BANKRUPTCY, PART X AND EXTERNAL ADMINISTRATION

30.                     LICENSING

31.                     HOW TO BUY OR START A NEW BUSINESS

32.                     STOCK

33.                     BUYING STOCK

34.                     GST

35.                     PERSONAL SPENDING

36.                     EQUIPMENT FINANCE – STRUCTURES

37.                     FACTORING

38.                     RETAIL PRESENTATION ISSUE

39.                     NAMES, SIGNAGE, LOGOS

40.                     ADVERTISING, MARKETING, YOUR POSITION IN THE MARKET

41.                     POSITIONING IN THE MARKET

42.                     SYSTEMS GROWTH AND FRANCHISES

43.                     ASSESS YOUR STRENGTHS AND WEAKNESSES

44.                     MATCH THE SKILLS WITH YOUR GOALS

45.                     LOOK FOR AN EXISTING OR A NEW BUSINESS WHICH MATCHES YOUR SKILL SET AND YOUR GOALS

46.                     WHAT TO LOOK FOR IN A NEW OR EXISTING BUSINESS

47.                     WHAT IF YOU DON’T HAVE THE SKILL SET TO INSTALL SYSTEMS AND PROCEDURES?

48.                     SYSTEMS

49.                     GROWTH

50.                     FRANCHISES

51.                     INSURANCE

52.                     RETIREMENT AND ESTATE PLANNING

53.                     TAXATION

54.                     THE CONTRACT PROCESS

55.                     DUE DILIGENCE

56.                     PART X, BANKRUPTCY AND EXTERNAL ADMINISTRATION

57.                     PART IX AND PART X ARRANGEMENTS

58.                     ADMINISTRATION FOR COMPANIES

59.                     RECEIVERSHIP

60.                     LIQUIDATION

BUYING A SMALL BUSINESS- CIRCULAR NO.2

1.                INITIAL STRUCTURE

2.                PARTNERSHIP

3.                COMPANY

4.                TRUST

ITEM 1 – INTRODUCTION

The first decision to be made is what type of business to buy or start.  This is bound up with what is driving you to take on a small business.

Many people go into business simply because of dissatisfaction with their present surroundings.  This will always be a motivating factor, but must be one of several.  If it is a sole motivator, then you are probably choosing a business as an escape, which may not be a sound approach.  Many people have gone into business simply because of the myth that, “All of the cash in the register belongs to me”.  This “cash register fever”, is often the downfall of small businesses. 

It is important that you examine whether or not you want to go into business and why,  then look at your skill-set and your budget to decide what type and size of business. 

INITIAL STRUCTURE

There are several structures available to you use in running your business:-

1.            Sole Trader;

2.                Partnership;

3.                Company;

4.                Trust.

Different structures suit different businesses and different business owners.  Which one you choose depends upon:-

1.                The size of the business;

2.                Your goals for the present and the future.

1.                SOLE TRADER

               Benefits

               Cheap, simple, easy to understand. 

               Dangers

               Unlimited personal liability, no ability to split income, Provisional Tax problems.

A Sole Trader business is simply you, yourself as the owner, one (1) individual owning the business.  It is simple and easy to operate.  You may not even need to register a business name (a cost of approximately $100.00).  If you use your surname and initials in the name of the business, a business name is not required to be required to be registered.  Alternatively, you can register a business name and be, for example, John Smith Trading as Rapid Electrical. 

The difficulty with being a Sole Trader is that any net profit generated by the business is tax to be paid by you personally.  Likewise, any debts payable by the business are owed by you personally.  There is no ability to separate your personal assets from debts and risks associated with the running of the business.

Further, you will be exposed to Provisional Tax (now called PAYG), which in the first two (2) years of trading, can place your business under severe strain.

2.         PARTNERSHIP

Running the business as a partnership between you and your business or life partner, at least allows you to split the income to keep the net profit in a lower tax bracket.  For example, a net profit of $52,000.00 would be split between the partners as $26,000.00 each, thereby lowering the tax burden.

However the same problem exists with personal liability for creditors, and the income can only be split 50/50 rather than any other proportion. 

3.         COMPANY

A Company is the most commonly recognized vehicle for running a business.  They are now reasonably cheap to run, easy to set up and commonly understood by clients and debtors and creditors.

            Benefits

            Limited liability, income splitting ability, lower tax bracket (Company rate);

            Dangers

            Additional tax payer (additional cost), increased complexity, personal guarantee problems and insolvent trading issues. 

Running a business through a Company gives the business a “legal life of its own”.  Your Company is an individual in its own right, a tax-payer, a legal entity; able to sue and be sued on its own.  You as Directors and Shareholders make the decisions about what the Company does, but the Company operates in its own right.

This corporate veil protects your assets from debts owed by the Company unless you have provided a personal guarantee (such as to your financier or a trade creditor), or you allow the Company to incur debts when you knew or should have known that the Company could not pay those debts (insolvent trading).

The company structure also allows you to split income.  Dividends can be paid to Shareholders based on their shareholding, and a little thought and assistance from your Accountant or Solicitor can give you some flexibility there.  In addition, the Company can incur tax liabilities itself and pay them at a flat rate rather than the graduating scale that applies to individuals.  The present Company tax rate is 30%.  The top marginal rate for an individual is 48%. 

There are some problems with Company structures however:-

(a)              An enormous volume of Company law and tax law applies to the operation of the Company, and your accounting structures (and therefore accounting bills) will increase.

(b)              Additional corporate and taxation returns will be required for the Company, over and above individual returns for the Directors and Shareholders. 

(c)           You are most likely to be required to provide a personal guarantee at least to your financier if not to your major trader creditors, thereby defeating the corporate protection of your own assets.  A little bit of thought and planning by your Solicitor and Accountant may resolve this issue to some degree. 

(d)          There are now some reasonably complex issues to do with loans between Companies and their Directors, and the transfer of monies which the Australian Taxation Office will call income and seek tax for, in circumstances where you might not think tax is payable.  Advice from your Accountant should keep this issue in check. 

(e)          There are fines and in some cases jail terms for directors who allow companies to trade whilst insolvent, that is, to incur debts when the directors knew or should have known that the company could not pay them as they fell due.

4.         TRUST

The Trust is still by far the most flexible (though the most complex), structure available for running a business.  If you have plans to grow the business, and expect it to be quite a profitable long term venture, then the Trust structure will give you the most flexibility for splitting and moving income into the lowest tax bracket.  

A Trust structure allows the net income for the business, at the end of the year, to be distributed among a number of beneficiaries thereby providing you with more people to split the income among, and lower the total tax payable.

The advantage of a Trust over a Company is that the proportion of income allocated to beneficiaries, can be altered from year to year, depending upon the income status of those beneficiaries.  A beneficiary can be any person named in the Trust document or any category of beneficiary referred to in the Trust document (for example any Company of which you are a Director or Shareholder which may be incorporated in the future).

As the Australian Taxation Office continues to attack legitimate businesses in an effort to take more income, and continues to alter the rules from year to year declaring long standing business practices to suddenly be illegal, flexibility is paramount.

Detriments of the Trust structure are additional complexity, the need, usually, for a Company to act as Trustee anyway, and additional accounting requirements. 

The most important thing is to ensure that any structure you adopt for your business, is understood by you well enough to be operated on a day to day basis.   You may well have to rely upon your Accountant to prepare returns and to deal with some of the more complex issues, but do not adopt the structure for the running of your business which you do not understand.  Either take the time to understand the structure by having it explained to you repeatedly until you do, or abandon the structure for something simpler.

STILL TO COME

 

1.                        TECHNICAL SIMPATICO

2.                        GOALS

3.                        PURCHASING A BUSINESS OR A COMPETITOR, MANAGEMENT AND THE BUSINESS

4.                        SIZE

5.                        MARKET DYNAMICS

6.                        WHAT BUSINESS TO BUY

7.                        VALUING THE BUSINESS

8.                        GOODWILL

9.                        FIXTURES, FITTINGS, PLANT AND EQUIPMENT

10.                     WORK IN PROGRESS AND DEBTORS

11.                     BUYING THE BUSINESS OR BUYING THE COMPANY

12.                     STARTING A BUSINESS FROM SCRATCH

13.                     GOING INTO COMPETITION WITH YOUR CURRENT EMPLOYER (COMPETITION CLAUSES AND RESTRAINT CLAUSES)

14.                     THE PURCHASING PROCESS

15.                     CONTRACT CONDITIONS

16.                     DUE DILIGENCE AND FINANCE CLAUSES

17.                     JOINT VENTURES AND EXPANSIONS

18.                     SYSTEMS, GROWTH AND FRANCHISES

19.                     HIRING AND FIRING

20.                     WHAT IS DISCRIMINATION?

21.                     WHAT IS SEXUAL HARASSMENT?

22.                     WHAT TO DO IF YOU ARE DISCRIMINATED AGAINST OR SEXUALLY HARASSED?

23.                     INDEX - ANTI-DISCRIMINATION ACT 1991

24.                     31.          APPENDIX - ITEM 2 – HARASSMENT COMPLAINT PROCEDURE

25.                     31.          WRONGFUL DISMISSAL – INDEX

26.                     32.          WRONGFUL DISMISSAL

27.                     33.          APPENDIX - CHECK LIST FOR DISMISSAL PROCESS

28.                     34.          Sample interview process - First or Second Interview

29.                     35.          FEEDBACK record book

30.                     36.          FIRST WARNING LETTER TO POOR PERFORMER

31.                     SECOND WARNING LETTER TO POOR PERFORMER

32.                     DEBT COLLECTION, CLIENT INDUCTION, CREDIT ASSESSMENT, COSTING YOUR PRODUCTS AND MARGINS

33.                     PRIVACY

34.                     BANKRUPTCY, PART X AND EXTERNAL ADMINISTRATION

35.                     LICENSING

36.                     HOW TO BUY OR START A NEW BUSINESS

37.                     STOCK

38.                     BUYING STOCK

39.                     GST

40.                     PERSONAL SPENDING

41.                     EQUIPMENT FINANCE – STRUCTURES

42.                     FACTORING

43.                     RETAIL PRESENTATION ISSUE

44.                     NAMES, SIGNAGE, LOGOS

45.                     ADVERTISING, MARKETING, YOUR POSITION IN THE MARKET

46.                     POSITIONING IN THE MARKET

47.                     SYSTEMS GROWTH AND FRANCHISES

48.                     ASSESS YOUR STRENGTHS AND WEAKNESSES

49.                     MATCH THE SKILLS WITH YOUR GOALS

50.                     LOOK FOR AN EXISTING OR A NEW BUSINESS WHICH MATCHES YOUR SKILL SET AND YOUR GOALS

51.                     WHAT TO LOOK FOR IN A NEW OR EXISTING BUSINESS

52.                     WHAT IF YOU DON’T HAVE THE SKILL SET TO INSTALL SYSTEMS AND PROCEDURES?

53.                     SYSTEMS

54.                     GROWTH

55.                     FRANCHISES

56.                     INSURANCE

57.                     RETIREMENT AND ESTATE PLANNING

58.                     TAXATION

59.                     THE CONTRACT PROCESS

60.                     DUE DILIGENCE

61.                     PART X, BANKRUPTCY AND EXTERNAL ADMINISTRATION

62.                     PART IX AND PART X ARRANGEMENTS

63.                     ADMINISTRATION FOR COMPANIES

64.                     RECEIVERSHIP

65.                     LIQUIDATION