Carrying out proper due diligence and following some simple rules may save you from running into nasty roadblocks.
The starting point to buying a family owned and run business is to determine a fair and reasonable price.
That price is determined by what the anticipated revenue stream will be and the anticipated expenditure.
Some expenditures are easier than others to establish (for example, government fees) but wages – which are normally the biggest expenditure – need to be looked at more closely.
For someone outside of the family buying a family business, the need to ensure the information you are given tells the whole story is paramount.
An accountant can help ensure you understand completely the profit and loss arrangements of the business as well as the benefits the vendor is receiving from the business and whether these are likely to continue under the new owner.
The challenge of a non-family member purchasing a family business can be great. The risk of losing a loyal customer base can be great if the new owner cannot perpetuate the success of its predecessor so it is important to take into account the importance of the person selling the business.
The path ahead may seem smoother if the purchaser is a family member. They come to the table with an insider’s understanding of the business and may have had the opportunity to observe the running of the business or even worked in the business. Regardless, the rule of having a definitive transition strategy remains key.
A family member as successor could still face the same challenges as someone at arm’s length making the purchase – both need to dot all the Is and cross all the Ts.
That’s not to say a buyer should expect things to turn sour, it’s about ensuring the vendor and purchaser start negotiations with a clear understanding of what each party has set out to achieve.
In either scenario – if you are purchasing the business as a family or non-family member – the checklist of steps to complete remains the same.
This includes ensuring all necessary licenses are in place, remembering that in some instances, licenses can be personal and not automatically transferrable.
These are not difficulties but are issues that need to be checked off correctly. Chances are the vendor’s accountant may be able to help with these formalities.
Justin Dowd is a family law specialist at Watts McCray. www.wattsmccray.com.au
