That can cost purchasers of businesses tens of thousands of Dollars.
For many, buying a business will be the second biggest financial investment of their lives……
Yet often, we see WA purchasers buying businesses that are either over-priced or doomed to failure. WHY? Because they do not systematically check out the business and they do not ask the “right” questions before they buy a business in Perth.
Over many years we have reviewed many WA businesses and we have identified 7 common issues that cause business buyers to end up with a bad deal.
1. Sustainable Profitability
A business is a money-making machine. That is what a buyer is paying for when they buy a business for sale… an income stream. A purchaser needs to know that his business will continue to generate profits at a similar or greater level than that advertised by the vendor or his agent.Unfortunately, many business buyers are too focused on historical profits and do not check out current trading performance and realistic expectations of future trading profits.It is generally better to pay a premium for a business with genuine growth prospects than to buy a business with little growth prospects for a “bargain price”.Be skeptical of businesses that do not have a good track record, but are “capable of growth”.
2. “Add Backs”
For most small to medium sized businesses, it is usual for adjustments to accounting profit to reflect the business profits before interest expense, depreciation and non-essential expenditures.Some schedules of add-backs are unreasonably optimistic about which items of expenditure can be disregarded. Make sure that you understand the business fully, so that you can substitute your own estimates of “add-backs”.
3. Wages
Financial statements and add-back schedules do not always reflect the genuine wages/labour component involved in a business. Again, work out a detailed labour roster required to run the business and ensure that this schedule and wages costs, (including superannuation, insurances etc) are fully taken into account.
4. Stock
Often financial statements do not show accurate opening and closing figures. Be skeptical if closing stock is significantly higher than opening stock, as this will inflate reported profits.
5. Sales Threats
Are there reasons why sales could be lost in the future? Situations that could adversely affect sales could include aggressive retailers moving close to your business and reducing your sales, redevelopment of the premises housing your business, new shopping centre opening up close by, potential loss of agencies or product lines.Ask lots of questions about potential changes in your sales environment.
6. Lack of Decent Business Records
Poorly documented businesses should be avoided unless you can verify by alternative means the businesses profitability.Poorly documented businesses are severely discounted in the market-place and should be avoided by the inexperienced business buyer.
7. Expectations of “Cash Money”
If it is not recorded in the books then do not pay for it. It is likely that some of the “cash” receipts (even if they exist) are used to pay cash expenses, which are also not documented.
To maximise your potential for success contact
Bernard Hoey or Amanda Robinett
for a
FREE ONE HOUR CONSULTATION
Tel: (08) 9472 4944
Email: office@burswoodpartners.com.au
OTHER CONSIDERATIONS WHEN BUYING A BUSINESS
Choosing the correct structure to buy a business in Perth can:-
- Minimize income tax.
- Position you to legally minimize or eliminate capital gains tax.
- Provide a comfortable degree of asset protection.
The wrong decision could cost you tens of thousands of dollars in tax!
Many business buyers are looking for a good income return and good growth in the value of their business.
Consider your business goals and preferences before you look at individual businesses because each business is likely to give a different outcome.
Your participation in the FREE initial
consultation may highlight many problems and opportunities
Call
Bernard Hoey or Amanda Robinett
Office: 136 Burswood Road, Burswood WA 6100
Tel: (08) 9472 4944
Email: office@burswoodpartners.com.au
Web: www.burswoodpartners.com.au
TAX ISSUES WE’VE SOLVED RECENTLY…
- Lodged 6 years of tax returns for a client running a small business… no late lodgement penalties!
- Tax penalties of $2,200 for late BAS cancelled upon request to the ATO.
- Negotiated 12 months interest free repayments on $19,500 income debt.
- Assisted business client with lost/destroyed records to prepare tax returns and BAS. Found client a good book-keeper.