Many business owners have told us this is the “boring stuff” – tax and finance. Albeit “boring”, every smart entrepreneur appreciates its importance.
Tax will forever impact your business’s success. You don’t need to be an expert on tax – that role is fulfilled by your accountant. However, you should be familiar with the broad issues.
Before buying a business, and definitely before making an offer, make sure you obtain skilfully crafted tax minimisation advice on several taxes, including:
- Income tax
- Payroll tax
- Transfer duty
- Fringe benefits tax
- PAYG withholding tax
Not only is it relevant to get things in order to minimise tax during the purchase of your business, you also need to have a plan to minimise tax throughout your whole business journey – beginning to end.
Something that is commonly overlooked, is a thorough appreciation of how the decisions made before buying the business will have ongoing and potentially substantial influence over taxes paid when the business is eventually sold (hopefully at a considerable profit), or passed down to the next generation.
It is an all too-easy and unfortunately common situation for a business owner to have entities and tax structures setup incorrectly at the start. As a very quick example, after say buying a business for $500,000 and ten years later selling it for $2.5 million; an astute entrepreneur who got the right advice before buying the business could pay no tax on the gain made at sale, whereas other unfortunate business owners could face taxes of $500,000 plus.
It’s not possible to outline the exact tax planning you need within this blog series, because everyone’s circumstances are unique and skilfully crafted tax minimisation planning requires tailored advice (i.e. you will need to meet with outstanding accountants like Munro’s to obtain the advice you need).
Aside from tax, the classic saying “Cash is King” is something you need to be prepared to handle.
As a result of not taking finance and compliance seriously, we’ve even seen profitable businesses collapse, due to running out of cash or getting into trouble with the Tax Man.
Your funding options and the decisions you make to finance the business purchase will obviously play a vital part when determining the financial viability of your business. You need ample money available to pay regular operating costs and a buffer to overcome unknown and unexpected costs which inevitably arise. It’s very important to know how you will service the debt and how you will repay it. These aspects of purchasing a business are best discussed with an advisor who will take into account your personal circumstances.
Err on the side of caution
When looking for and evaluating a business, far too many future owners see only the positives and possibilities. They are naturally optimistic when pursuing an exciting opportunity, and either blind or ignorant to the potential risks and problems, whether big or small, short-term or long-term.
It's great to be enthusiastic about what the future holds if you were to buy a business; however, we recommend you err on the side of caution.
Be sceptical of what the seller tells you.
Before buying the business, you need to extensively consider your financial projections to ascertain whether the business is financially sustainable. The seller will provide their profit and loss statements with adjustments (add backs) meant to represent a truer reflection of the business’s performance. You must be very sceptical of the numbers the seller presents.
Be aware that the seller will naturally believe their business is worth more than it really is.
If the current business owner isn't retiring, then be extra careful. Are they jumping ship? There may be underlying issues inherent that aren’t visible to the naked eye!
When it comes to analysing the business’s prior profit performance, one particular thing to be aware of is that the seller, their family and friends, may have been working in the business for no or little pay. If you fail to properly account for the previous owner’s underpaid efforts, you could find yourself buying a job – and it could be very low paying!
It’s not worth buying a job; buy a business which can be highly profitable
With years of experience, we really do recommend that you only buy a business which is, or has the capability to be, highly profitable. This doesn’t mean it has to make you millions of dollars each year, rather, it at least should be able to make a profit of double what you could otherwise earn had you been an employee.
Business is bloody hard, so don’t put yourself and family under that much stress to make a profit that’s going to be no better than a salary – or even worse. Ensure that when you buy a business, you're going to be rewarded for the risk and responsibility that you are subjecting yourself to.
Next up in the final instalment of this series on Buying a Business in WA, we will talk about the exact framework you should follow to help you achieve success as you go about buying a business.
Our next FREE event is on Tuesday 26th November and is strictly limited to 12 aspiring business owners. You can reserve your seat here: https://bit.ly/2qsb2oG