- Sole proprietorship/sole trader – easy to set up, minimal establishment and accounting costs. Sole trader is entitled to receive all profits but also liable for all losses, unlimited liability in respect of claims including negligence.
- Partnership – A partnership deed is recommended, establishment costs minimal, partners are jointly and severally liable for partnership debts and have unlimited liability.
- Private company – the company is liable for all debts, liability of the shareholders is limited to the extent of unpaid capital, except in cases where Directors or shareholders give personal guarantees in respect of the company’s liabilities. A company can exist indefinitely, shares may be sold, Directors may be changed easily.
Each ownership option has its advantages and disadvantages and will need to be considered thoroughly prior to a decision being made.
What are some of the practical aspects of buying a small business?
The first consideration must always be, why does the present owner want to sell? The object is to satisfy yourself that you are not buying someone else’s problem. Key considerations are:
Is the business trading profitably? Are the turnover figures correct and able to be substantiated? At the outset you should always have your accountant check the financial viability of the business. You and your accountant will need to consider whether the business will provide:
- A market rate on the capital investment.
- A level of remuneration which reflects your time, energy and skill.
- An additional amount to cover the risk of running your own business.
What competition exists in the market place? Is new competition likely?
Should goodwill be paid? What are you getting - Client lists? Premises? Reputation?
Consider location – parking, foot traffic, the possibility of rezoning etc?
Stock, plant, fixtures and fittings. Consider the possibility that the plant you are buying may not belong to the seller and may be mortgaged in some way. You must be satisfied as to ownership and market value of the plant and you will usually need to employ an independent valuer.
Is the price reasonable?
What is the situation with the current employees? Will you wish to retain them? What are the terms of their existing employment agreements?
What should you consider before entering a franchise agreement?
Ensure promises made by the franchisor are put in writing. At the outset discuss the franchise agreement with your lawyer. Franchise agreements tend to be drafted in the favour of the franchisor and it is important to obtain legal advice.
Talk to people with a trading history with the same franchise in other areas.
At the outset get financial/accounting advice on the likely financial performance of the franchise.
Always be aware that a new franchise without a track record is much more risky than a well established franchise.
What are some of the practical aspects of creating your own small business?
Naming the Business – the Fair Trading Act 1986 specifies if you are working in trade you may not engage in conduct that is or is likely to be misleading or deceptive. You cannot use a name that would lead the public to believe that you are associated with another firm, company or person if that is not true. You cannot use a name that infringes a registered trademark.
Location – does the location have the correct zoning for the type of business? Is planning permission required?
Borrowing Funds – is borrowing necessary at this point? If borrowing is necessary you need to present the proposition correctly to the potential lender. You must know how much you need, have the facts and figures on hand, have budgets and cash flows prepared as well as proof of assets, liabilities and security available.
GST Registration – if turnover is likely to be in excess of $40,000.00 per annum you will need to register and account for GST.
Intellectual Property – should you register your intellectual property? Protection can be obtained via patents, trademarks and copyrights.
Insurance – does your current insurance policy cover your small business venture?
These are but some of the matters your lawyer will check for you in the purchase of a small business or a franchise, or the establishment of your own small business. Taking the right advice at the very beginning and recognising the risks at an early stage could allow you to avoid a very costly mistake.
