If you’re on your way to realising your dream of becoming a business owner, congratulations. Instead of starting from ground up, perhaps you have decided to purchase an existing enteprise? The finances are in place, you have found a business you are keen to buy and you are ready to sign on the dotted line. But what exactly are your purchasing? Are you buying the business assets or buying the shares in a company that currently runs the business? Are you aware of the difference?
Buying a business
Business assets are items such as goodwill, customer lists and intellectual property, in other words, the core items that make up a business. There can also be plant and equipment such as warehouse vehicles or cars and trucks. Depending on the vendor, leases and employees could at times be included as part of the sale. Should employees and leases not be part of the sale, you will have to seek new staff and/or premises which could delay getting the business fully operational.
Buying a company
Purchasing a company, however, will result in you acquiring all business assets, employees, leases and all items that aren’t transferred out prior to sale. This could be an attractive option as it means business-as-usual. Except for the change in ownership, no new registrations or account details for existing customers would be required.
The importance of due diligence
However, buying a company is not without its risks. When you purchase a company, you also take on the history of the company – both good and bad – including the assumption of all company debt and existing liabilities. This includes contingent liabilities that may not be apparent, such as a future claim for an unsafe workplace or dismissal. Therefore, an extensive due diligence should be completed if you are considering buying the shares in a company. Without one, you will not know what the company’s compliance history has been like nor whether it has any outstanding liabilities to its employees, or to the Australian Taxation Office for unpaid taxes and/or superannuation guarantee.
Incidental costs and other factors
Another factor to weigh up when deciding on which option to pursue is the consideration of incidental costs. In some states, transfer of business assets (such as goodwill) attracts stamp duty, making the purchase of business assets a more expensive option. GST must also be considered when purchasing the assets, but not so much when purchasing the shares.
Aside from all the factors listed above, there are also various other legal and commercial considerations you will need to weigh up.
Accru has a track record of achieving excellent outcomes for clients purchasing or selling many types of enterprises. Whatever option you are considering, your local Accru advisor can assist you in analysing the different factors involved.
By Chee Hii, Accru Melbourne