Q&As

Tax Considerations of Acquiring an Established Business with Iain Spittal and Emmanuelle Roulet

Friday May 25, 2018

Iain Spittal Crop

Iain Spittal is a Partner of PKF and is part of the specialist Taxation team in Sydney. One of Iain's specialty areas is in international taxation and cross-border structuring. 

Emmanuelle Roulet Crop

Emmanuelle Roulet is a Tax Manager and works in the specialist Taxation team, based in Sydney office.

Legalwise Seminars interviewed Iain and Emmanuelle about the challenges and trends in the industry today. You can read the full Q&A below.

Can you tell us a bit about yourselves?

Iain Spittal is a Partner of PKF. For more than 16 years, Iain has provided specialised corporate tax advice to a range of clients in Australia and the United Kingdom. He has worked with his clients on all taxation matters impacting the private and corporate sector, including acquisition and divestment of assets, group restructures, mergers and acquisitions, cross-border structuring, tax planning, tax consolidation, loss recoupment and high level negotiating with the Australian Taxation Office. One of Iain's specialty areas is in international taxation and cross-border structuring.

Emma Roulet is a Tax Manager and has over 7 years of experience and has been providing tax advisory and tax compliance services to a broad market spectrum, including public and private companies, multinationals and high net worth individuals. She has been focusing primarily on corporate and international tax, including cross-border advice and tax planning for inbound and outbound investment, as well as taxation due diligences.

In Australia, PKF is a group of like-minded, independent firms focused on providing quality service to decision makers in business and has 65 partners and 555 staff located in Sydney, Melbourne, Brisbane, Perth, Canberra, Hobart, Newcastle, Gold Coast, Tamworth, Rockhampton and Walcha. Each of these firms are members of the PKF International Network which has offices in 440 cities, 150 countries across 5 continents.

What are some of the challenges your clients facing when they purchase an established business?

The main challenge for a purchaser is to clearly understand the value of the established business to be acquired and determine and negotiate an appropriate price. Purchasers need to understand how much the business is currently worth and which factors determine the business’ value. This includes going through the burden of due diligence procedures including financial, tax and legal due diligences. Professional and thorough oversight is paramount in this regard to mitigate this risk.

In addition, a purchaser will have to face the complexities of the deal itself, including structuring considerations for the acquisition as well as going through the process of negotiations, contingencies and timeframes. As every deal has Inevitably its hiccups and impasses, expertise and adept negotiation skills are required in order to move past unexpected hurdles.

Access to information may also be a challenge sometimes. For an existing and operating business, maintaining maximum confidentiality is pivotal to the success of the business and transaction and therefore access to the information may be delayed or incomplete in some cases.

What are the common mistakes practitioners usually make when they assist their clients in this area?

The most common mistake usually relates to due diligence procedures being inadequate and incomplete. Without a full and accurate due diligence, it will be difficult for a purchaser to have a clear and real picture of the business being acquired, which may result in overestimating the purchase price.

Structuring opportunities may also not always be considered and/or maximised, for example considerations relating to which entity of a group should buy the business, opportunity to form a tax consolidated group etc.

Finally, sale and purchase agreements may not have been reviewed from a tax perspective although this is crucial to limit any tax liability exposure post-acquisition.

What are the pros and cons of acquiring an established business?

Buying an established business rather than setting up a new business has many advantages but is not without risk.

The main advantages of buying an established business are as follows:

- An existing business is a known entity. It has an established and historical track record. This includes a financial and tax history which gives an idea of what to expect and can make it easier to secure loans and attract investors.

- Buying an established business usually means potentially immediate cash flow as all set-up costs have been already incurred.

- Operationally, the start-up work has already been done and the business should have plans and procedures in place. It has a physical location and has plant, equipment, furniture etc.

- Existing employees are experienced and are a valuable asset. They will have experience that they can share.

- A market for the product or service is already established. The purchaser acquires existing goodwill, customers and contacts.

- In addition to the existing relationships with customers or clients, the purchaser acquires other business relationships such as with suppliers, banks, advertiser, insurance companies, professional advisors etc.

The main disadvantages of buying an established business are as follows:

- A larger amount upfront needs to be invested and there will also have to be a budget for professional fees for solicitors and accountants.

- In the case of an under-performing businesses, it may require a lot of investment to make the business profitable.

- As the purchaser inherits from operations, there may need major improvements to old plant and equipment or the business may be badly managed or with low staff morale.

- There may be some issues with the goodwill where the seller's personality and their established relationships is a major factor for the success of the business.

- There may be a poor public image inherited from the previous owner.

Would you advice your clients to purchase an existing business or establish their brand new one?

Starting a business can be a great learning experience for someone who is able to wait before realising the fruits of the hard work and investment. It is much more difficult than buying an established business and entails additional elements of risk in turning a mere concept into a thriving and profitable business. In addition, the failure rates for start-up businesses are usually substantially higher.

As such, astute entrepreneurs are usually looking to buy an existing established business with a track record of performance rather than to assume the risks and burden of starting a business. There is little doubt that buying an existing business with a turn-key operation can be more cost effective and less risky than a start-up. Financially speaking, establishing a new business can be the proverbial “money pit”. When purchasing an established business, the business is in operation and a price is established. The purchaser knows exactly what they are getting for their money.

Furthermore, the purchaser may negotiate for management and operational support before and after the business is sold to insure a smooth training/transition of business sale.

In light of the above, we would therefore advise to purchase an existing business rather than establishing a brand new one.

Your topic will be focusing on ‘Tax Considerations of Acquiring an Established Business’, what are the ‘non-tax considerations’ clients need to keep in mind?

Other considerations apart from tax include the following:

- Financial considerations including a review of historical and forecast revenue, expenses, profits, assets and liabilities etc. as well as an analysis of the drivers behind maintainable profits and cash flows.

- Legal considerations to assess the legal risks related to the corporate status, major contracts, securities, intellectual property etc.

- Understanding why and what are the reasons the business is being sold?

- Whether the business structure need to be changed to suit the purchaser’s business needs?

- Whether the acquisition is made with a partner and if so, what is the arrangement with the partner?

What do you see are some of the key takeaways and benefits for practitioners for their practice from attending your session?

An established business may be acquired either through the purchase of shares or through the purchase of underlying assets.

Practitioners will gain an understanding of the key tax implications related to the purchase of shares versus the purchase of underlying assets. In the case of shares purchase, they will learn how tax consolidation can affect an acquisition. In addition, we will be highlighting issues to consider when reviewing sale and purchase agreements and cover some considerations in relation to the vendor’s tax position.

Ian has worked with clients based in many different countries and is experienced with the tax requirements for countries including USA, Canada, France, UK, Singapore, Japan, Switzerland, Germany, Ireland, Chile, New Zealand, Pakistan, China, Hong Kong, and India.

Emmanuelle has a focus on corporate and international tax, including cross-border advice and tax planning for inbound and outbound investment. Having worked in Australia (Perth and Sydney), Central Africa and France, she has provided advice to clients in a number of jurisdictions including Asia (Singapore, China, Malaysia), Europe (UK, France, Germany), as well as most of the francophone African countries.

Learn more from Iain and Emmanuelle at the Business Formation, Tax Planning & Exit Strategies conference in the Primus Hotel Sydney, on Tuesday June 19.

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