Buying a Business

Do your due diligence.

That’s something you’ve probably been told or read about as you’ve been making your way through the buying a business journey. But what does it mean and what should it achieve?

They’re interesting questions to answer and one’s we have some important insights to share.

Due diligence, with regards to buying a business, generally refers to the process of investigating the claims, facts and overall situation to uncover the truth. Its purpose is to help you decide whether the business is actually worthwhile buying.

What you might not know is that not all types of due diligence uncover the same truths. You can limit the due diligence in many ways. It might only look into:

• Tax and legal;
• The financials for the last couple of years, as opposed to the last five years; or
• It might include a customer analysis, supplier analysis and/or key dependency risk.

Generally, we’re advocates for conducting a comprehensive due diligence.

It just doesn’t make sense to have limited due diligence given the substantial dollars involved and the risks you’re taking to buy the business. That’s a key lesson we’ve seen learnt the hard way by new business owners.

Let us share a couple of brief learning experiences to emphasise our point:

1. At the beginning of a due diligence project, often you’re supplied with a detailed due diligence checklist to get a good understanding of what could be done.

   Sometimes people chose to reduce the scope to a limited financial due diligence.

   A limited financial due diligence will result in a report expressing the opinion of the financial health of the business.

   For instance, it might say that the business has been steadily getting worse over the last few years. In circumstances like that, this might make you go back to the negotiating table and perhaps reduce the purchase price accordingly.

   You would have benefited from the due diligence, but, because it was limited in scope, otherwise identifiable challenges would not have been addressed prior to the acquisition.

   For example, a limited financial due diligence would miss key customer dependency risk. Such as, the situation where a major part of the customer base had ties with the prior owner.

   This could subsequently lead to the loss of many customers shortly after the business changed owners, which naturally would have a major negative impact on revenue and bottom-line profit.

2. In this second learning experience regarding doing your due diligence, a business was acquired and for a few years, things were going pretty well for the new owners. However, unbeknown to them, they were operating against local council laws.

   What happened next was a sad struggle to keep the business afloat. Eventually the owners had to abandon the business, as the local laws make it unviable.

   Prior to buying the business, if a comprehensive due diligence had been completed, it is likely that the law breaking problems would have been uncovered.

   This would have allowed the prospective buyer the opportunity to proactively resolve such issues prior to the purchase, or directed them to buy an alternative/viable business instead.

To summarise, one must always be extremely careful when buying a business. Limiting a due diligence may be appealing in terms of being less costly and quicker, however, the long-term implications may prove very costly.

With experience, we’ve learnt to look for and find more and more otherwise hidden risks.

We are invested in wanting to assist you in buying a business that has the best chance for long-term success.

If you’re keen for this outcome, please reach out to us.

When you are looking at either starting or buying a business, considering asset protection strategies beforehand is vital. This is because it is very important that you take the time to properly protect your assets and wealth.

In this short video, we will introduce the first two principles of what asset protection is and why it is so important.

Principle #1: Separate Risk from Assets

• Business risks should be kept separate from investment assets.
• When running a business, you have risks whenever you enter into a contractual relationship with customers, suppliers and employees.
• In most cases, the minimum business structure required will include a trading entity and a separate Asset Holding Entity. We call this a “Level One” Structure.
• The Asset Holding Entity should never have business relationships, it should only invest or loan funds to related entities.

Principle #2: Choose a Risk-Taker and an Asset-Holder

• Within a Family Group, you should choose one individual to be a “Risk-Taker” and another individual to be an “Asset-Holder”.
• The Risk-Taker should be the main person involved in your business and therefore should be the director and/or trustee of the trading companies.
• The Asset-Holder should not be, or act, or seen to be acting as a director of any trading company. The Asset-Holder should be in control as a director, trustee and shareholder of any Asset Holding Entity.
• Where possible, the Risk-Taker should not own any assets in their own name. The Risk-Taker should be an “unattractive” target to take legal action against. If possible, the family home should be owned 100% by the Asset-Holder.
• The Asset-Holder should earn or receive enough annual income from fully franked dividends or trust distributions to cover loans repayments for the family home and any other assets in their name. Otherwise, if the Risk-Taker is made bankrupt, their Bankruptcy Trustee may attempt to claw back what is known as contributed equity if the Risk-Taker has made loan repayments on assets held by the Asset-Holder.

If you’re interested in learning more about asset protection strategies, then watch our videos on basic and advanced asset protection strategies over on the Wealth Protection for Business page; or book a Get To Know Each Other meeting via the How We Get Started page.

We’re here to help.

When buying a business, financing is a key component. Whether through savings, loans or investors, determining how much you need is the first step.

Prepare realistic financial projections alongside your business plan, incorporating benchmarking and scenario analysis.

Consider various scenarios:

• realistic;
• break-even; and
• the outlook for the first 12, 24 and 36 months.

This helps in understanding cash requirements and the funding needed.

A common mistake is underestimating costs. The purchase price might be higher than expected, and additional costs like legal fees, settlement fees, duty and GST often get overlooked. Anticipated costs are often assumed to be lower than they actually are, and contingencies are neglected. An objective, experienced and independent assessment can help avoid these pitfalls; which is part of the professional service we provide.

If you’re considering a loan, there’s much to deliberate: the bank, loan product, borrowing entity, security for a mortgage and guarantees. Business finance brokers can be valuable allies in this process.

By the time you seek funding, your business entity structure should be determined, optimised for tax mitigation and wealth protection. Tax deductibility of interest is influenced by several factors, and we’re aware of cases where the ATO has denied deductions when necessary substantiation was not established.

For funding from investors, there are other aspects that need careful consideration. Such as, negotiating ownership percentages, thorough legal documentation, and clear expectations and exit plans.

Ultimately, funding should enable your business to survive and thrive. Plan for adequate financing to withstand a tough start, even as you hope for the best.

At the end of our Buying a Business page, you’ll find a spam-free Buying a Business Diagnostic. It only takes a few minutes and can offer additional insights.

Feel welcome to join Munro’s Business Academy for more practical support.

When you’re ready for direct help, please schedule a free Get To Know Each Other meeting.

We’re here to support your business journey from start to finish. See you soon.

In this video we will go through some of the key considerations you will need to make when hiring employees.

1. The first consideration is assessing your business needs:

Before you start, it’s a good idea to assess your business needs so that you can hire the right person for your business.

If you need help with just one specific task, such as bookkeeping, paying for their advice as a contractor is probably the best way to go. However, if you need someone to help with the day-to-day running of your business and to look after clients or customers, you may need an employee.

When determining whether you need an employee or contractor you need to think about:

• The tasks you need the employee or contractor to do;
• Any skills and qualifications they’ll require;
• How busy the job will be;
• How long you think you’ll need them for; and
• If you intend on hiring an employee, you will also need to think about if you are going to hire them on a full-time, part time or casual basis.

2. The second consideration is ensuring that you comply with the Fair Work Employment Standards or other relevant legislation.

As an employer, you are legally obliged to pay your employee the right wage for their work. A great place to start understanding what your legal obligations are when you hire employees is the Fair Work Ombudsman website.

Generally, the employment standards require employers to:

• Issue employees with payslips;
• Ensure the minimum employment standards and minimum pay rates are adhered to as set out by the Fair Work Ombudsman;
• Provide full and part-time employees with paid annual leave based on their ordinary hours of work, which is generally four weeks for each 12 months of service; and
• Provide full and part-time employees with 10 days personal leave (sick and carers leave) each year.

3. The third consideration is complying with your other legal requirements, such as:

1. Registering for PAYG Withholding.

   As an employer you must:

   • Understand the residency status of your employees;
   • Work out the amount to withhold;
   • Report and pay tax withheld amounts to the Australian Taxation Office; and
   • Provide income statements to employees and lodge an annual Single Touch Payroll finalisation report with the Australian Taxation Office after the end of each income year.
2. You also have superannuation guarantee obligations.
   • Superannuation is a retirement savings program in Australia to help provide employees with a pension in retirement.
   • There is a minimum amount you must pay based on your employee’s ordinary times earnings and current superannuation guarantee rate.
   • The payments need to be made to the employee’s nominated superannuation fund within the legislated time period. The obligation to pay superannuation is very strict and if the rules are not followed, then significant penalties, such as 200% on the amounts originally owed, may be imposed.
3. Have you taken out workers compensation insurance?
   • Workers compensation insurance is a form of insurance paid to employees if they are injured at work. It is typically compulsory for employers and needs to be taken out in each state you employ people in.
4. You also need to consider other insurances.

• • Business insurance brokers can often help with this.

4. The fourth consideration is setting up your systems. Such as:

Have you setup Single Touch Payroll (STP)?

Under Single Touch Payroll, employers send payroll information to the ATO each time they process their payroll.

This ensures that the ATO has up-to-date information on employee salaries and wages, and helps to streamline the reporting process for employers. It is a mandatory obligation for any employer who hires staff for their business.

There are a number of STP-enabled software solutions available, including both desktop and cloud-based solutions.

Have You Setup Your SuperStream Payments?

SuperStream is a way for businesses to make employees superannuation guarantee payments electronically. This means that businesses will need to send employee contributions to their chosen fund using an ATO-approved electronic data and payment method.

The purpose of SuperStream is to streamline the process of making super payments, making it simpler and more efficient for both employers and employees.

There are a number of different ways to setup your SuperStream payments, including using SuperStream compliant payroll software.

Have you prepared an Employment agreement?

An employment agreement sets out an employee’s rights, as well as your expectations about their performance and duties. Having an employment agreement is important for your business because, amongst other things, it can help protect your intellectual property and confidential information.

Once you have these essentials in place, you can then start looking for an employee.

When looking for an employee, you could consider:

• advertising your job vacancy online;
• using a recruitment agency; or
• asking friends and colleagues if they know anyone who may be suitable.

Once you have found your new employee, it is vital for you to also:

1. confirm if the new employee has the right to work in Australia;
2. if so, you will need to provide them with a tax file number declaration form that allows you to appropriately withhold tax from their pay; and
3. a superannuation choice form that lets them choose their preferred super fund.

Employee hiring and management is seldom a one off event, but rather an ongoing relationship that requires constant communication, feedback, and support.

If you do it right, you can build a loyal and motivated team that will help you take your business to the next level.

If you’re needing assistance with business and employment matters, please let us know. We’re here to help.