Things to Consider When Starting a Business or Buying an Existing Business

Over the past few months, I have spoken to a number of people who were either wanting to start a business or buying an existing business. Following are some of the things you need to consider when starting a business or buying an existing business that can make a significant impact on the likely success of the business.

  1. Have you appropriate experience in the industry you are wanting to enter?
  2. Are you aware of what barriers to entry exist to entering the industry? Generally, the easier it is to enter the more likely that you will face considerable competition;
  3. Do you have sufficient funds to cover any shortfall of cash in the first three years;
  4. Are you likely to need a family member to go guarantee for a loan to get the business started? If the answer is yes then you need to think very seriously about the potential consequences.  Remember organisations ask for guarantees because they have some serious concerns about your ability to meet payments.  Do you really want to risk destroying family relationships in the event that something goes wrong?
  5. Do you have a clear business plan as to what the you are wanting to achieve through the business including your exit strategy?  Your exit strategy, as well as the appropriate business structure, can vary depending on what your proposed strategies are.  Various business structures also have different capital gains tax issues and can make the passing of the business to others either easy or hard.
  6. Have you done a budget setting out what revenue you expect to generate and what costs you are likely to incur – allow unexpected costs and shortfall in revenue, things rarely go to plan.
  7. Have you a strategy if the business takes off beyond your expectations?
  8. Have you a very clear idea of how you are going to price your products or services and exactly what products or services you are going to sell?  To put it another way, do you fully understand what clients are seeking?
  9. If you are buying an existing business all the above apply but in addition you will want
    • A three year set of financials and tax returns for the business;
    • A very clear understanding of what exactly it is that you are buying e.g. are you simply buying the business or the structure as well;
    • To undertake appropriate due diligence having regard to the amount you are paying for the business;
    • Will you be taking over an existing lease for premises and how long has the lease got before the need to renew and is there in fact an option to renew;
    • What will happen with existing staff if any?
    • You may wish to impose some form of restraint of trade on the seller to stop them from setting up a new business in opposition down the road;
    • Is there any GST associated with the purchase?
    • Have any loan approvals in place prior to signing any contract of purchase or at the very least an appropriate subject to finance clause.
    • Seek appropriate professional advice e.g. accountant, solicitor, mortgage broker and financial planner.

This is not meant to be an exhaustive list but as a general guide to things that will help you succeed.  Please speak to our staff at Balanix for specific advice relevant to your situation = 07 3264 4783

David Balwin FCPA Registered Tax Agent
Don’t have an Accountant – call me today to help 07 32644783