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Conducting due diligence when buying an existing business

By December 3, 2020 Business

You’ve found the perfect business for you to buy. It fits all your requirements and you’re in a position where you can comfortably buy the business. What’s next?

Before you sign the contract to finalise the buy, it is important to conduct due diligence. For this, you should review the financial records, business operations and legal documents. These will prepare you to manage the business and identify any risks or problems in process that you might need to tackle head on. You will also be able to better understand what will be expected of you as owner of the business and which responsibilities have been allocated to that position. 

You should review items such as: 

  • Licenses and permits: Have all the necessary permits and licences been acquired, and if not, look into why this might be the case – were they denied a permit due to any issues with the business?
  • Contracts and leases: Have you spoken to the landlord and whether they’ll be transferring the lease agreement/negotiating a new lease? Is the business in contract with another that is problematic?
  • Agreements: Are there any agreements the business is in that you don’t feel comfortable with?
  • Status of plant, equipment, and fixtures: What is the current status of the equipment and machinery? When will you need to replace it? Has it been approved by the relevant authorities?
  • Assets: Identify any assets that are under the business. Does it have any intellectual property? 
  • Inventory: How much inventory is there? Is it included in the sale? How is the inventory managed and will you still be able to source it from the same place? What is the status of the current inventory i.e. can it be used?
  • Liabilities: What liabilities do you need to be aware of? Are there any outstanding debts? Any fines, warranties, refunds that need to be paid for? 

Additionally, you need to conduct financial due diligence. Examine the past 3 to 5 years of the following financial documents:

  • Tax returns
  • Business activity statements (BAS)
  • Records of accounts receivable and payable
  • Balance sheets
  • Profit and loss records
  • Cash flow statements
  • Sales records

You should examine these to make sure that record-keeping has been conducted and maintained appropriately. This will also inform you of any changes that need to be made once you start running the business yourself. 

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Self-managed super funds (SMSF) aren’t just about financial investment

By December 3, 2020 Super

Individuals may be looking to opt for an SMSF because these provide entire control over where the money is invested. While this sounds enticing, the downside is that they involve a lot more time and effort as all investment is managed by the members/trustees. 

Firstly, SMSFs require a lot of on-going investment of time:

  • Aside from the initial set-up, members need to continually research potential investments. 
  • It is important to create and follow an investment strategy that will help manage the SMSF – but this will need to be updated regularly depending on the performance of the SMSF.
  • The accounting, record keeping and arranging of audits throughout the year and every year also need to be conducted up to par. 

Data shows that SMSF trustees spend an average of 8 hours per month managing their SMSFs. This adds up to more than 100 hours per year and demonstrates that compared to other superannuation methods, is a lot more time occupying. 

Secondly, there are set-up and maintenance costs of SMSFs such as tax advice, financial advice, legal advice and hiring an accredited auditor. These costs are difficult to avoid if you want the best out of your SMSF. A statistical review has shown that on average, the operating cost of an SMSF is $6,152. This data is inclusive of deductible and non-deductible expenses such as auditor fee, management and administration expenses etc., but not inclusive of costs such as investment and insurance expenses. 

Thirdly, investing in SMSF requires financial and legal knowledge and skill. Trustees should understand the investment market so that they can build and manage a diversified portfolio. Further, when creating an investment strategy, it is important to assess the risk and plan ahead for retirement, which can be difficult if one is not equipped with the necessary knowledge. In terms of legal knowledge, complying with tax, super and other relevant regulations requires a basic level of understanding at the very least. Finally, insurance for fund members also needs to be organised which can be difficult without additional knowledge. 

Although SMSFs have the advantage of autonomy when it comes to investing, this comes at a price. Members/trustees need to invest time and money into managing the fund and on top of this, are required to have some financial and legal knowledge to successfully manage the fund. 

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What record-keeping requirements does the ATO have in place?

By December 3, 2020 Tax

Record-keeping, if done well, can help running a business much easier. It gives you an overview of the business’ financial progress so that owners can assess their strengths and weaknesses and make decisions accordingly. Record keeping also enables owners to meet their tax and superannuation obligations easily – all the data and information required is readily available. Finally, record-keeping provides owners with a profile, of sorts, which demonstrates the financial position of the business to banks or other lenders. 

Record-keeping requirements related to tax and superannuation need to be met. The specifics will depend on the unique tax and superannuation and obligations your business may have and the structure of your business (sole trader, partnership, company or trust). 

The Australian Taxation Office (ATO), requires the following from all businesses: 

  • The records cannot be changed and further, the information should be kept so that it cannot be changed or damaged. 
  • The records must be kept for 5 years from the date they were prepared, obtained or a transaction was completed – or the latest act they relate to. The records might need to be kept for longer periods in certain circumstances. 
  • The business must be able to show the ATO their records if requested.
  • The records must be in English or easily translated into English.

The ATO will accept paper and electronic records. 

  • There has been an inclination towards electronic record-keeping for both tax and super requirements as this makes certain tasks easier and reduces workload after initial set up. There may be some laws which require paper records in addition to electronic ones. 
  • Businesses may also keep paper records electronically i.e. scan paper documents and store them on an electronic medium (and dispose of papers).
  • If records are stored electronically, then they should be on a device which owners have all access to, has been backed up, and allows the owner to have control over the information that is processed, entered or sent from the device. 

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The risks involved in debt consolidation

By November 25, 2020 Money

Debt consolidation is a form of refinancing which involves taking one larger loan out to pay off multiple small ones. Although this might make managing repayments easier, you may end up paying more money interest rate or fees. 

There will be companies that make offers which are too good to be true. If you feel that an offer is unrealistic and the company is promising that they can get you out of debt no matter what your situation is, you should reevaluate using their services. Don’t trust companies that: 

  • Are not licensed
  • Ask you to sign blank documents
  • Refuse to discuss repayments
  • Rush the translation process
  • Won’t put all loan costs and interest rates in writing before you sign
  • Arrange a business loan when you only need a consumer loan

The goal behind the consolidation is to manage your payments, not create more fees and interest for you. Therefore, before signing onto an agreement, check how consolidation compares with your current fees and interest rates altogether. Also, take into account expenses and penalties associated with your existing loans and whether you will have to pay more money for paying off your loan early. If the expenses work out to be more, it might not be worth going through this entire process. 

Debt consolidation isn’t the only option if you’re struggling with repayments. Other options may be available which are more suited to you. You should discuss with your mortgage provider, credit provider or financial advisors to determine if there is anything that can be done. 

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