The Cost of Establishing a Substantial Small Business (buying one; or setting one up)

Whether you intend to buy a small business, or to set one up from scratch, there are many costs which are often overlooked by owners and which, if not incurred, could cause them to suffer financial pain later on. Not doing things properly and spending the required amounts, adds to the probability that your business will be one of the 75%+ that fails within the first 4 years.

The costs explained below, exclude the following major and necessary cost items:

1. transfer costs, such as business name transfers; trademark assignments , chattel lease transfers; telephone line transfers; and transfer of domain names, to name but a few;
2. all usual searches for PPSR; Titles; bankruptcy; local council; and utilities; and, of course
3. Transfer Duty (Stamp Duty), if you are purchasing a business.

There will usually be 4 major items of legal cost, as follows:

Establishment Costs:

1. performing your due diligence on what you intend to do or buy (speak to your accountant about this, before doing anything). This will involve consideration of such things as, prospective sales and margins; and costs such as rent (lease and many others);
2. cost of setting up your legal structure in the form of a company (as operator itself, or as trustee for a family discretionary trust); a partnership, or a joint venture;
3. where you are buying a business, there will be a need for a contract of purchase to be prepared and advised upon and settled;
4. cost of having prepared constitutional agreements, such as partnership, or shareholders’ agreements, to regulate the rights and responsibilities between the parties, such as operations; funding and buy out;
5. registering trademarks, business names and domain names;
6. insurance on your partner’s life and vice versa (your insurance broker can advise on this);
7. key man insurance (your insurance broker can advise on this);
8. commercial insurance, such as professional indemnity and public liability
9. commercial agreements with third parties: The following agreements may need to be reviewed or prepared, or have negotiated amendments made to them, with the help of your solicitor: licensing agreements; employment; and distribution agreements.

Your personal Estate Planning: while you are alive: Powers of Attorney; and Enduring Guardianships: These will assist your to protect your investment in the business by allowing for it to continue its operations, in the event that your become unable to work in it, or make decisions for it;

When you pass on: A Will: A Will nominates to whom you want your interest in all your assets to pass, including any investment in your business, which you may wish to continue for the benefit of, for example, your children. Your Will should underline who is to become a new director of any company and a new trustee of any trust, in the event that your die. There are many other matters to be considered by you in the preparation of your Will, but these are just some, that are directly relevant.

Premises:

1. if you are taking an assignment of a lease (existing business) or entering into a new lease (new business to be established), you should take legal advice on the terms of the lease, so that you know what your obligations and rights are;
2. it is standard practice for establishers or buyers of businesses to pay the landlord’s legal costs of preparing the new lease or the assignment;
3. the landlord’s mortgagee may have some legal costs in giving consent to the proposed assignment, or new lease, to your company or trust;
4. and, of course, there will be the costs of stamping and registration of the lease which, like all the other costs, are payable by the proponent owner of the business.

Depending on the circumstances, these upfront costs can be substantial ($10,000.00 – $20,000.00), excluding accountant’s costs and transfer duty on  purchase of the business, which is calculated by a scale, relative to the value of the business (ad valorem transfer duty).  At Wilson Haynes, we discuss these matters fully with you and your accountant, if necessary, before you set sail with your plans for your new business.

© Jim Wilson, Principal- Wilson Haynes, solicitors-conveyancers-business advisers 2016