Buying a Business – Understanding What You Are Really Buying

When purchasing a business it is important to understand and be clear about what it is that you are buying. From the outset you need to understand the difference between buying the business, as opposed to buying the business structure (for example, shares in a company). Once this has been established you must ascertain exactly what assets are included.

A business can consist of many components, some tangible whilst others not. Some information on issues to be aware of when purchasing each type of asset is provided below.

Plant & Equipment – It is generally recommended that the fixed assets of the business are listed in a schedule to the contract and specific amounts are attributed to each item. If the vendor is unwilling to provide a schedule, at the very least you should insist on a separate value for the total plant and equipment. You will later need to apportion the value to individual assets on a reasonable basis or obtain and independent valuation.

Trading Stock – If the business is being acquired with stock, special arrangements will need to be made to ensure you receive what is stated in the contract and have sufficient stock to commence trading. It is usual to adjust the stock value on the day of settlement to reflect the actual value of what is being taken over, as determined by a stocktake.

Premises – If you are purchasing the premises as well as the business you need to evaluate the financial decision to purchase the premises separately from the business to ensure there is an adequate return on the premises should you later decide to rent it to someone else.

Goodwill & Other Intangibles – A successful business will have a value that exceeds the value of the tangible asset such as the plant and equipment and stock – this intangible asset is known as the business ‘goodwill’. The valuation of goodwill can be complex and you need to consider the specifics of each proposed purchase.