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  • #995402
    Rob T
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    Hi All,

    When purchasing an existing (small) business, on settlement does the purchaser pay back expenses that have been paid in advance, or are those usually already included in the purchase price of the business?

    Examples of such expenses: municipal rates, water rates, insurances, etc.

    Is it also the same for:

    • Deposit for the office lease?
    • Accounts payable and receivable?

    Thanks!

    Rob

    #1201742
    Kylie Holbeck
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    This will all depend on what you are actually purchasing. There are a variety of different ways to purchase a business that affect the outcome. e.g. are you purchasing shares in business or are you purchasing the income stream. I would recommend getting good legal and accounting advice before purchasing any business as you may end up purchasing a whole pile of gremlins that you didn’t anticipate. e.g. ato debt, warranties etc

    #1201743
    Mischelle
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    Kylie is spot on you need to ask your accountant….

    But, if I was buying the whole business that would mean the entire business and all outstanding pre-paid expenses are part of that business, all accounts payable and receivable which also includes all outstanding debt owing it’s all part of the business as well.

    #1201744
    Easysmb
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    Hi Rohan,
    As Kylie pointed out. There are two options for buying a business:
    1. Taking over current business’s legal entity, like transfer shares to yourself of a pty ltd entity.
    2. Just buy the business with your existing entity or a brand new entity.

    If you use option 1: You are the owner and you are bearing the current assets and liabilities, be careful of the potential liabilities that you might not be aware of when negotiate the price. You may inherit lots of unexpected liabilities.
    Option 2 is a more common way for purchasing new business. You will not have unexpected liabilities.

    Talk to your accountant, it is recommended to use option 2 by using your own legal entity.

    Good luck.

    #1201745
    Rob T
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    I see. Thanks very much, everyone. I’ll definitely be seeking advice from an accountant or lawyer.

    #1201746
    Paul – FS Concierge
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    Hi Rob,

    Couple of quick points – as a buyer, you could look at putting everything you want on the table and everything you do not want off the table – depending on the market conditions for the particular business, you may be able to negotiate more than you might initially think.

    [USER=80732]@Easysmb[/USER] indicate the normal method for buying a business ie, you buy the business, not the business entity.

    Typically, you would have to pay for work in progress if there is any but start “your accounts” on the day of settlement.

    Hopefully some more helpful members will be along soon with some on-point advice.

    Cheers

    #1201747
    bb1
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    As with anything, its all negotiable, and than just put it in the contract, for adjustments if required.

    Unless you have become emotionally involved in the purchase, you are at the steering wheel, and can insist on whatever you want, it is than up to the seller to agree or disagree

    #1201748
    Rob T
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    Great advise! It now sounds so obvious but it didn’t come to my mind that this is negotiable. Thanks guys!

    #1201749
    Paul – FS Concierge
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    Rob T, post: 239221, member: 7235 wrote:
    Great advise! It now sounds so obvious but it didn’t come to my mind that this is negotiable. Thanks guys!
    It is also not unusual to sequester some of the funds to a solicitor’s trust account to be released at points in time by events that satisfy you.

    Eg, Set aside $50K for 3 months with $20K to be released after 60 days if sales are at least or more than 2015/2016 and the final $30K after 90 days if sales are at least or more than 2015/2016.

    Good luck with the negotiations.

    #1201750
    cameronryan
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    99% of small business sales are the transfer of assets and goodwill from one entity to another, not the sale of shares. Accordingly, there is generally a Statement of Adjustments prepared at settlement to allow for amounts paid by the Vendor in advance that the Purchaser ultimately benefits from (ie. municipal rates, water rates, building insurances, etc).

    Further, the Purchaser generally needs to provide a new rental bond/ security deposit to the Landlord and the Vendor has his/ her’s returned to them.

    The Vendor retains/ is legally responsible for all debtors/ creditors up to the day of settlement. Again, these don’t transfer (unless you’re buying the shares of the company).

    Happy to provide any other advice if required.

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