CHECKLIST IN BUYING A BUSINESS In an increasingly complicated commercial world, buying a business holds far more hidden dangers than buying a property. There is no certificate of title to provide a comforting assurance that you own the business and, in many cases, the most valuable assets of the business will be intangible. We advise numerous clients on the purchase of an extremely wide variety of businesses of all sizes. From our experience, we are able to help you to negotiate the best possible deal and minimise the risk of encountering legal problems at a later date. We suggest that you consult our "Buying a business checklist pamphlet". Agreement for Sale and Purchase Often we are presented with agreements for sale and purchase that have been signed by all parties, but do not sufficiently protect the client's interest as purchaser. Ideally, we should either prepare the agreement or peruse the agreement before signing, as the costs involved are often less than the costs of sorting out complications with an agreement that we have not prepared or perused. Remember that the risk of a business purchase is very much on you rather than the vendor and it may well be difficult, if not impossible, to recover any losses from the vendor at a later date. If we do not prepare or peruse the agreement, it will be advisable to protect your interests by making the agreement subject to our approval. Matters to be Considered when Buying a Business (a) Legal Structure There are a number of ways in which a business can be structured. We will need to advise you on whether it is more advantageous to purchase as a sole trader, as a partnership or in the name of a company. Among many factors influencing this decision are the risk involved in the business, the ability to give security in order to obtain finance, tax implications and the need to protect your trading name. We suggest that you read our "Forming your company" pamphlet to assist you in this decision. (b) Assets The assets of a business generally consist of plant, fixtures and fittings, stock and goodwill. Often, the purchase price is divided very arbitrarily between the three components. Plant, Fixtures and Fittings should be as high as possible (within reason) so that you can claim the maximum possible depreciation on those assets. Of course, the vendor will want to keep the amount allocated to those assets as low as possible so that he can avoid paying tax on depreciation recovered. A full list of plant should always be prepared. Partner Contact: Les Allen (City - Ph 303 3764), Michael Hockly or David Munn (North Shore - Ph 414 9800) (Rev 04/11) Checklist in Buying a Business 2 Stock on hand at settlement is normally estimated. The exact stock figure is determined by stock-take on the settlement date and any necessary adjustment is made at that point. Goodwill is an extremely vague concept, related in varying degrees to such things as the value of the lease (if any), the name and reputation established by the business, and its profitability, a good locality, good management, possession of lucrative contracts and good relations with employees. In some cases, one or other of the parties attempts to calculate the amount of goodwill by applying accounting formulae, for instance by relating it to the "super profits" earned by the business or to its turnover. ("Super profits" is an accounting term to describe the profits earned by the proprietor in excess of a reasonable salary for his services and a reasonable return on his funds.) In many other cases, the goodwill factor is calculated rather less scientifically, simply by deducting the amount allocated to plant and stock from the total purchase price. In any event, goodwill cannot be written off for tax purposes and, from the purchaser's point of view, there is no advantage in having a high goodwill factor. The goodwill of the business will include intangible assets such as trade marks, copyright, patents and franchises. It is imperative that you should advise us of any such assets so that we can ensure that you acquire valid rights to them. Any book debts of the business are normally retained by the vendor so that the purchaser does not have the responsibility of recovering debts owed to the previous owner. (c) Restraint of Trade The form of the agreement for sale and purchase almost invariably requires the vendor not to set up a similar business within a certain radius of the present business premises, during a certain period. This restraint of trade will only be valid if it is reasonable under the circumstances. (d) Insurance The assets are usually at the risk of the vendor until settlement or possession (whichever is the earlier). (e) Settlement Before settlement, we will advise the amount required from you in order to settle the purchase. After settlement, we will provide a full statement, setting out details of the amounts received and paid on your behalf. GENERAL The above comments are intended to give you a greater understanding of the considerations and procedures involved in purchasing a business. However, we have only been able to traverse a small part of this rather complex topic and would be happy to advise you on any other aspects of the matter. We look forward to a continuing association with you in your business, and trust that you will not hesitate to contact us if you require advice on finance, income tax, goods and services tax and any other legal matters that arise in the course of conducting a business.
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