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Buying a business is a major decision. The purchase of a business can be done either through an asset sale, or the purchasing of shares in a company or interests in a trust. Regardless of the choice, it is important to ensure that a due diligence report into the business to be purchased has been conducted. The checklist below highlights common areas that must be considered when buying a business. The information gathered should be discussed with your professional adviser.
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Financial health |
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1 |
Have you obtained the last four years financial statements of the business? |
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2 |
Have schedules of the following been obtained, where applicable: liabilities (including contingent liabilities), inventory, and accounts receivable and payable? |
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3 |
Have you obtained an up-to-date copy of the business’s credit report, if available? |
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4 |
Has a comparison between the business’s gross profits with the industry trends been done? |
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Taxation considerations |
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Have you obtained the last four years tax returns of the business? |
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6 |
Have you obtained confirmation that all taxes such as income tax, GST, PAYG withholding and payroll tax are up to date? |
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7 |
Have you familiarised yourself with the tax obligations of the entity to be purchased? TIP: Where the business is conducted through a company, consideration must be given to the duties of a director under the tax law. |
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8 |
Have you considered the stamp duty implications on the purchase of the business? |
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9 |
Have you considered whether the purchase of the business will be a supply of a going concern, ie GST free? |
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Where a business is sold through an asset sale, the purchaser does not inherit any tax liabilities of the business. However, where a business is sold through the sale of units or shares, the purchaser inherits the tax liabilities of the business. Where a business is sold through the sale of units or shares, it will not qualify for as a supply of going concern, ie the purchase of the units or shares will be an input taxed financial supply. |
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If you are buying a business through an asset sale |
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10 |
Has an asset register been obtained detailing all the assets being sold? TIP: The register should detail the following information about the assets: the original purchase price, the purchase date, the depreciation rate used, the effective life of the asset, and the written down value. |
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11 |
Have you checked the ownership and condition of the assets being sold? |
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12 |
Where the assets are leased by the business, have you obtained copies of the leases? TIP: If you are taking over the existing leases, consideration should be given to whether the leasing terms are reasonable. |
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13 |
Are the assets adequately insured until settlement of the purchase? |
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14 |
Has the purchase price been apportioned across the assets being purchased? |
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If the purchase contract for an asset sale includes the purchase of the business’s trade debtors, you will not be able to claim an income tax deduction for bad debts. |
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