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  • #966999
    billybaxter
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    Hi
    I am about to buy a business.

    It is a takeaway food shop in a shopping complex.

    The owner has told me I need to see a lawyer and draw up a contract of sale. Is this correct? Shouldnt he be doing this?

    We have agreed on a sale price and now just need to take it to the next step.

    Normally, I assumed, he would hae a business broker (or agent similar to a real estate agent) who would have the contract ready for me to sign if I agree to all the points?

    Any input would be apprecited

    Thanks in advance

    Billy

    #1022568
    James Millar
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    Yes the vendor should provide at least a draft contract of sale. Practically they are the ones selling “the business” and therefore they are the ones that need to determine exactly what is for sale and under what conditions – otherwise you are guessing (specifics of fixed assets, lease terms and sub lease etc etc). A heads of agreement will often faclitate this process and ensure that the fundamentals that both parties want are contained within the draft / final contract. Then get your lawyer to review the vendors contract (amazing that they asked you to prepare it).

    Not sure what state you are in but Victoria has regulations regarding the sale of micro business – primarily in the Estate Agents Act (yes i’m not sure who decided that estate agents were the most suitable to undertake this process but thats the way it is). I think the current threshold for this regulation is anything under $350k. They need to provide a section 52 statement that contains a reasonable amount of standard due dilligence type items (financials etc). Its certainly no substitute for proper due dilligence and you should have an accountant look over it all (and get one thats is experienced in the sale of business DD process).

    Be careful buying a cash based take away store if you are not comfortable that “off the books” proceeds are untrue (and of course its illegal not to declare income to the ATO so know one here would endorse that practice).

    Whats the approx purchase price?

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1022569
    billybaxter
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    JamesMillar, post: 26552 wrote:
    Yes the vendor should provide at least a draft contract of sale. Practically they are the ones selling “the business” and therefore they are the ones that need to determine exactly what is for sale and under what conditions – otherwise you are guessing (specifics of fixed assets, lease terms and sub lease etc etc). A heads of agreement will often faclitate this process and ensure that the fundamentals that both parties want are contained within the draft / final contract. Then get your lawyer to review the vendors contract (amazing that they asked you to prepare it).

    Not sure what state you are in but Victoria has regulations regarding the sale of micro business – primarily in the Estate Agents Act (yes i’m not sure who decided that estate agents were the most suitable to undertake this process but thats the way it is). I think the current threshold for this regulation is anything under $350k. They need to provide a section 52 statement that contains a reasonable amount of standard due dilligence type items (financials etc). Its certainly no substitute for proper due dilligence and you should have an accountant look over it all (and get one thats is experienced in the sale of business DD process).

    Be careful buying a cash based take away store if you are not comfortable that “off the books” proceeds are untrue (and of course its illegal not to declare income to the ATO so know one here would endorse that practice).

    Whats the approx purchase price?

    that was a lot of great advice there, thank you.

    as far as the purchase price, this is also were it gets complicated. he wants 105k for it and i only have 88k – 17k short.

    he has offered to transfer the whole business into my name as long as we have a seperate agreement that says i will pay him a percentage of the profits, with a clause in that agreement that says i can pay him the 17k whenever i want, which would then stop him receiving a percentage of the profits.

    i am in qld by the way.

    i just wish he wasnt so stingy and used a business broker to sell the business so it would be easier than it is.

    #1022570
    James Millar
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    It really comes down to how well you know the vendor. If it’s a complete arms length third party then a post sale / settlement profit share arrangement is going to be problematic. If it’s an associated party then it could be done but it’s still not ideal.

    The other main issue is who determines what profit is? What information do you have to disclose with him? It’s very easy to genuinely manipulate accounting profit (true profit – not taxable income) in different directions depending on what your needs are. You would need to prescribe pretty carefully the exact methodology in determining “the profit” for any given period (is accelerated depreciation allowed, asset revaluation effect, management salaries and benefits etc). You could easily (and genuinely) show accounting losses for the duration of that part of the contract and he would not be eligible for anything – which I’m sure he would not be too happy about.

    I would be more inclined to suggest it be treated as conventional vendor finance with a risk adjusted interest rate payable to him until the loan is settled. Prescribe a maximum period for repayment so that you have something to work towards and it also provides him with a firm commitment for repayment.

    Also check if there is an equivalent requirement in Queensland to the Vic Section 52 statement.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1022571
    billybaxter
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    JamesMillar, post: 26622 wrote:
    It really comes down to how well you know the vendor. If it’s a complete arms length third party then a post sale / settlement profit share arrangement is going to be problematic. If it’s an associated party then it could be done but it’s still not ideal.

    The other main issue is who determines what profit is? What information do you have to disclose with him? It’s very easy to genuinely manipulate accounting profit (true profit – not taxable income) in different directions depending on what your needs are. You would need to prescribe pretty carefully the exact methodology in determining “the profit” for any given period (is accelerated depreciation allowed, asset revaluation effect, management salaries and benefits etc). You could easily (and genuinely) show accounting losses for the duration of that part of the contract and he would not be eligible for anything – which I’m sure he would not be too happy about.

    I would be more inclined to suggest it be treated as conventional vendor finance with a risk adjusted interest rate payable to him until the loan is settled. Prescribe a maximum period for repayment so that you have something to work towards and it also provides him with a firm commitment for repayment.

    Also check if there is an equivalent requirement in Queensland to the Vic .

    god this is so stressful but im gonna stick with it and see a lawyer and accountant today.

    im kind of glad he offered the idea of sticking around as part owner until i can pay him the difference as it makes me feel comfortable that he doesnt wanna cut and run, and is confident enough to stick around for a while. im also going to try and just pay a set fee weekly instead of a percentage of profits as this (like u said) makes it more complicated.

    thanks for all the advice.

    ill keep u posted.

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