Starting a business is always a daunting task, but this is especially the case when stepping into a pre-existing business. It is critical to know what you may be getting into legally and financially if you choose to purchase a small business. Listed below are the five key questions any potential business owner should ask themselves before committing to that purchase.
What is the structure of the business being purchased?
When purchasing a business the previous owners will already have an existing structure . Depending on which structure they have will impact upon your legal rights such as tax and liability. It is important then to consider whether your particular needs match the current structure or if a change is needed like a partnership agreement
Example
Sarah runs a small flower store in her local shopping centre. She currently has her business registered as a sole trader. Laura is interested in purchasing Sarah’s business and to continue running it as a flower store. In this case, it makes sense for Laura to either keep the structure the same or maybe switch to a partnership if she lacks the money or time to purchase and run the business.
Whether to keep the existing ABN and Business Name
The name of a business is how customers establish loyalty and associate a reputation to a name. If you decide to keep the previous business name, there are considerations set by ASIC such as renewal periods for business names will not carry across when a business name is transferred. However, before you choose to either register under a new business name or keep the existing name an ABN is needed first.
How will you finance the purchase?
The next pressing issue is usually always finances. The are two main ways to fund the purchase of a business. This can be through equity, that is using your own funds or those of a fellow partner in the business or debt through loans. Factors to take into consideration would include:
- Remodelling of the store
- Lease arrangements and rent
- Business registration costs
- Whether all new stock has to be purchased
- Retraining or hiring new staff
Outstanding debts and arrangements
When seeking to purchase a small business, it is vital that the purchaser considers any outstanding debts or existing arrangements that may be in place. For example, the seller may be leasing the premises in which the business operates. The purchaser should be aware of any existing lease agreements and negotiate the conditions moving forward. Similarly, the seller may have no intention of removing the existing employees upon sale and therefore the purchaser must decide whether to retain them or not. These factors can be set out as the terms and conditions of the purchase in a business sales agreement
Tax implications for your small business
A purchaser must factor in the potential tax implications they will incur when buying a small business. This can have a significant impact on the overall cost of purchasing the business. The choice of the business structure itself can affect the tax a business owner will be liable to pay. In a general sense, GST and capital gains tax should be points for consideration. Once in operation, the business owner will also be taxed on income generated.
Don’t know where to start? Contact a LawPath consultant on 1800 529 728 to learn more about what business structure is right for you, customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.
