BUYING A SMALL BUSINESS- CIRCULAR NO.5

1.            STARTING A BUSINESS FROM SCRATCH

An alternative and seemingly cheaper option to buying an existing business, is to start your own. 

Benefits of starting your own business:-

(a)              Can be cheaper;

(b)              Can be set up using your own systems and procedures in your own manner;

(c)              Can be grown at your own pace;

(d)              Requires less immediate capital input. 

Disadvantages:-

(a)              More likely to fail;

(b)              May not be any cheaper in the long run;

(c)              No track history of income which will affect both financing and prospects of success;

(d)              No client base, no goodwill, no market presence.

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

You may be considering setting up in competition to your present employer, and even, perhaps, taking some of your employer’s clients with you. 

Contrary to common belief, this is not automatically taboo.

Unless you have signed a restraint clause, there is nothing to prevent you from setting up in competition with your employer, and taking some clients with you. 

There are some rules however:-

1.                You cannot, in preparation for your departure, use your employer’s equipment, systems, procedures or records to lure clients away.

2.                Generally speaking, you cannot take client records with you, which have been copied before your departure.  Photocopying and removing client lists, ledgers, data bases, or precedents is not permitted. 

3.                You cannot use your employer’s telephone and other systems to “set clients up to leave”, prior to your departure. 

In the absence of a Restraint Agreement however, there is nothing to stop you from speaking with customers once you have left, and soliciting them to come with you. 

If you are subject to a Restraint Agreement, you should take that Agreement to your Solicitor and have it looked at to see if it is binding and reasonable, prior to deciding upon your course of action.

You are not permitted to run a “parallel business”.  That is, you are not permitted to stay employed with your present employer, and run a separate business in competition with your employer, unless you have your employer’s specific permission. If this is granted you should ensure the permissions is in writing. 

STILL TO COME

 

1.                        THE PURCHASING PROCESS

2.                        CONTRACT CONDITIONS

3.                        DUE DILIGENCE AND FINANCE CLAUSES

4.                        JOINT VENTURES AND EXPANSIONS

5.                        SYSTEMS, GROWTH AND FRANCHISES

6.                        HIRING AND FIRING

7.                        WHAT IS DISCRIMINATION?

8.                        WHAT IS SEXUAL HARASSMENT?

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

10.                     INDEX - ANTI-DISCRIMINATION ACT 1991

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

12.                     31.          WRONGFUL DISMISSAL – INDEX

13.                     32.          WRONGFUL DISMISSAL

14.                     33.          APPENDIX - CHECK LIST FOR DISMISSAL PROCESS

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

16.                     35.          FEEDBACK record book

17.                     36.          FIRST WARNING LETTER TO POOR PERFORMER

18.                     SECOND WARNING LETTER TO POOR PERFORMER

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

20.                     PRIVACY

21.                     BANKRUPTCY, PART X AND EXTERNAL ADMINISTRATION

22.                     LICENSING

23.                     HOW TO BUY OR START A NEW BUSINESS

24.                     STOCK

25.                     BUYING STOCK

26.                     GST

27.                     PERSONAL SPENDING

28.                     EQUIPMENT FINANCE – STRUCTURES

29.                     FACTORING

30.                     RETAIL PRESENTATION ISSUE

31.                     NAMES, SIGNAGE, LOGOS

32.                     ADVERTISING, MARKETING, YOUR POSITION IN THE MARKET

33.                     POSITIONING IN THE MARKET

34.                     SYSTEMS GROWTH AND FRANCHISES

35.                     ASSESS YOUR STRENGTHS AND WEAKNESSES

36.                     MATCH THE SKILLS WITH YOUR GOALS

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

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

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

40.                     SYSTEMS

41.                     GROWTH

42.                     FRANCHISES

43.                     INSURANCE

44.                     RETIREMENT AND ESTATE PLANNING

45.                     TAXATION

46.                     THE CONTRACT PROCESS

47.                     DUE DILIGENCE

48.                     PART X, BANKRUPTCY AND EXTERNAL ADMINISTRATION

49.                     PART IX AND PART X ARRANGEMENTS

50.                     ADMINISTRATION FOR COMPANIES

51.                     RECEIVERSHIP

52.                     LIQUIDATION

BUYING A SMALL BUSINESS- CIRCULAR NO.4

1.            WHAT BUSINESS TO BUY

Having decided on a target industry (or perhaps a group of two (2) or three (3)), where do you look?

Business classifieds, and business brokers, have always been the best source of potential leads for businesses.  You can speak with the local trade association for the industry in question, and many (news agencies, medical practices, child care centers for example), have their own listing processes.

The benefit of dealing with a broker is that you should receive more organized and presentable information.  You also have someone who can chase and find information for you regarding the business.

It is important that you have a rudimentary understanding of how to value businesses in your target industry. 

2.            VALUING THE BUSINESS

The value of business is broken up into several parts:-

(a)              Goodwill;

(b)              Fixtures and fittings;

(c)              Debtors;

(d)              Work in progress;

(e)              Plant and machinery. 

3.            GOODWILL

This is the most difficult component of the business to value.  It is the component the Vendor asks for which compensates him for the fact that you will receive on-going income from the machine that he has built. 

It is usually calculated as a multiplier of the average net income of the business over the last three (3) years.

Every type of business has a different multiplier.  It is important that you speak with your Accountant and the industry association (if there is one), to find out what the goodwill multiplier is. 

This figure is usually the most hotly contested and intensively negotiated part of a business purchase. 

Different industries have different multipliers (for example accountancy practices a multiplier of 1 between .8 and 1, legal practices a multiplier of .3 etc.)

Multipliers are often expressed as percentages based on the return you receive for the purchase price (eg caravan parks, 16%, that is you should receive 16% return on the purchase price, or put another way, the net income should be 16% of what you paid for the goodwill). 

Percentages are multipliers that may be moved backwards and forwards depending upon the quality of the business, its years of trading, the volatility of the market, the desperate nature of the Vendor, or patchy trading history of the business. 

4.            FIXTURES, FITTINGS, PLANT AND EQUIPMENT

Most often these items are bought that their “written down value”, that is, the value to which the Vendor has written them down in the depreciation schedule for those items of equipment.  Sometimes however, there is contention between the Vendor and Purchaser over this value. 

The Vendor may wish to keep the fixtures, fittings, plant and equipment figure low and the goodwill figure high in order to minimize Capital Gains Tax.  The gains tax paid on the goodwill component of the business by a Vendor, is considerably lower than other items of the business. 

Conversely, the Purchaser, if he can legitimately raise the value of the fixtures, fittings, plant and equipment, will gain additional depreciation benefits, and will lower the “indexed cost base” of the business, the starting figure for your Capital Gains Tax bill which you will eventually pay when you sell the business. 

Any figures used in the purchase between the parties, must be able to be justified to the Australian Taxation Office.  It is important that you consult both your Solicitor and Accountant in relation to ensuring that whatever action you take with the breakdown of the purchase price, is sustainable and can be justified to the Australian Taxation Office.

Many parties simply decide not to complete a breakdown of the purchase price, and “go their separate ways”, in relation to recording the breakdown of the components of the business. 

5.            WORK IN PROGRESS AND DEBTORS

It is not normal to buy the debtors of a business (that is the outstanding debts which have already been invoiced by the Vendor but have not yet been paid).  If you were to buy the shares in the Company which runs the business, rather than the business itself (see below), then all of the assets of the Company remain in tact.  Otherwise, the debtors belong to the Vendor, and the Vendor may collect them (with or without your assistance). 

Ordinarily, some assistance is provided by you, as you will be dealing with the customers and cheques will be coming in to the business premises.  You are not responsible for any invoices which were issued before the settlement date, which are not collected.

With regard to work in progress (orders which have not yet been completed, delivered and invoiced) you may:-

1.                Buy these at invoice price;

2.                Not buy these but be faced with having to complete the work (not recommenced);

3.                Split the proceeds;

4.                Pick a particular part of the process (for example orders completed and ready for delivery), and use that point to divide jobs between Vendor and Purchaser. 

6.            BUYING THE BUSINESS OR BUYING THE COMPANY

Occasionally, it is suggested (and there may be some benefit), in buying the shares in a Company which runs the business, rather than buying the business assets from the Company.

If the Vendor uses a corporate structure for example XYZ Pty Ltd trading as ABC Fencing, there are two (2) separate entities, the business ABC Fencing, and the Company which owns that business XYZ Pty Ltd. 

You may buy the business from the Company which is not a legal entity.  You set up your own structure and commence trading as a brand new entity, from day one.

Alternatively, you may buy the shares in XYZ Pty Ltd and have that Company continue to trade as ABC Fencing.

If you do so, the Company will be owner of the business both before and after settlement, and you will simply own the shares in that Company and have the ability to direct it.

Most of the benefits flow to the Vendor by using this structure, and you will inherit any sins and skeletons in the closet committed by that Company prior to the date for completion.  There may be Capital Gains and Stamp Duty benefits to be gained by you however, and certain non-transferable licenses (depending upon the industry), might be able to be preserved by using this structure.  It is not normally recommended however.   

STILL TO COME

 

1.                        STARTING A BUSINESS FROM SCRATCH

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

3.                        THE PURCHASING PROCESS

4.                        CONTRACT CONDITIONS

5.                        DUE DILIGENCE AND FINANCE CLAUSES

6.                        JOINT VENTURES AND EXPANSIONS

7.                        SYSTEMS, GROWTH AND FRANCHISES

8.                        HIRING AND FIRING

9.                        WHAT IS DISCRIMINATION?

10.                     WHAT IS SEXUAL HARASSMENT?

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

12.                     INDEX - ANTI-DISCRIMINATION ACT 1991

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

14.                     31.          WRONGFUL DISMISSAL – INDEX

15.                     32.          WRONGFUL DISMISSAL

16.                     33.          APPENDIX - CHECK LIST FOR DISMISSAL PROCESS

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

18.                     35.          FEEDBACK record book

19.                     36.          FIRST WARNING LETTER TO POOR PERFORMER

20.                     SECOND WARNING LETTER TO POOR PERFORMER

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

22.                     PRIVACY

23.                     BANKRUPTCY, PART X AND EXTERNAL ADMINISTRATION

24.                     LICENSING

25.                     HOW TO BUY OR START A NEW BUSINESS

26.                     STOCK

27.                     BUYING STOCK

28.                     GST

29.                     PERSONAL SPENDING

30.                     EQUIPMENT FINANCE – STRUCTURES

31.                     FACTORING

32.                     RETAIL PRESENTATION ISSUE

33.                     NAMES, SIGNAGE, LOGOS

34.                     ADVERTISING, MARKETING, YOUR POSITION IN THE MARKET

35.                     POSITIONING IN THE MARKET

36.                     SYSTEMS GROWTH AND FRANCHISES

37.                     ASSESS YOUR STRENGTHS AND WEAKNESSES

38.                     MATCH THE SKILLS WITH YOUR GOALS

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

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

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

42.                     SYSTEMS

43.                     GROWTH

44.                     FRANCHISES

45.                     INSURANCE

46.                     RETIREMENT AND ESTATE PLANNING

47.                     TAXATION

48.                     THE CONTRACT PROCESS

49.                     DUE DILIGENCE

50.                     PART X, BANKRUPTCY AND EXTERNAL ADMINISTRATION

51.                     PART IX AND PART X ARRANGEMENTS

52.                     ADMINISTRATION FOR COMPANIES

53.                     RECEIVERSHIP

54.                     LIQUIDATION