by Jonathan Hanaghan - JonathanGrant Business Accountants
15th April, 2019
Thinking of buying a management and letting rights business?
So, you’re a first-time buyer and looking to get into the industry…
Well, while by no means exhaustive, what follows is a basic staged plan that may assist with the process. It should be viewed as a guideline and while some of you may require a more detailed approach, others may be lucky enough to have it even easier.
Step 1 –Do your homework
Review as many businesses as you can. Get a feel for the type of complex that ideally suits you. You may want a permanent with minimal office and garden hours, or you may be chasing a dollar and wanting to purchase a larger short-term complex or perhaps something that has been run down and in need of some TLC.
Step 2 – Establish what your budget is
Seek advice from an industry specialist financier or finance broker to determine how much you can borrow and what your budget is.
Step 3 – Find the right complex and negotiate price
This will solely depend on your circumstances. Discuss your offer with the applicable agent and hopefully you will have a verbal agreement. Be aware though, that its not uncommon for the offer and acceptance process to take some time.
Step 4 – Engage an industry specialist accountant and lawyer
You will need both to assist you with the process but the immediate priority needs to be the establishment of a business ownership structure. This can be either as a sole trader, partnership, company or trust or a combination depending on your circumstances. Taxation and asset protection circumstances generally weigh in heavily with this choice as they vary widely. Typically, your accountant will establish the structure then your lawyer will document the contract and advise you on the details.
Step 5 – Sign the contract
Generally speaking the contract will contain three major conditions. Firstly, income verification, secondly finance and thirdly legal due diligence (which also covers body corporate approval).
Making sure you understand each element is crucial. In essence, this gives you three get-out-of-jail cards, should you need them, or if your circumstances change during the process.
Step 6 – Income verification
Your accountant will complete the income verification in accordance with the contract for sale. This will cover the most recent twelve-month period (or projection if off the plan) with the view to verifying an actual net operating profit figure as specified in the contract. This profit figure is usually the number the vendor’s accountant has calculated for the same or similar period. Owner letting agreements are also checked, and any variances in letting pool numbers during the verification period, are reported.
Step 7 – Obtain finance
Your financier will require a copy of the income verification report and various other documents. Your financier may also require amendments to the body corporate caretaking agreement.
Step 8 – Follow your solicitor’s advices
Your solicitor will guide you through legal due diligence including obtaining body corporate approval.
Step 9 – Statutory and licensing requirements
Make sure all applicable ATO registrations are in place as Australian Business Numbers can take up to 28 days to be processed. OFT licensing can also take longer than expected so make sure this process is well advanced.
Step 10 – Record keeping
Careful consideration needs to be given to record keeping for the trust and general bank accounts. We recommend specialised software be purchased or leased. Advice from your industry-recognised accountant should be sought rather than just going with “what the vendor was using”.
Step 11 – Hand over process
You will need to negotiate the hand over process with the vendor; this is commonly one week prior to and one week following settlement. Try to extract as much knowledge from the vendor as possible during the agreed period. I also recommend having a coffee or similar with the chairman/chairwoman of the body corporate as soon as possible following settlement. After all, the body corporate committee can be your strongest advocate or your worst nightmare.
In summary always stick to and take advice from your industry experienced accountant, financier, solicitor and sales agent and the purchase process should run as smoothly as possible.
Good luck to all those readers looking to purchase in the near future!