Purchasing another business could expand your business overnight. It might enable you to take advantage of new economies of scale, or diversify into new areas.
But an acquisition can also bring problems, draining financial and management resources from your original business.
This article considers some of the pros and cons in expanding your business through an acquisition.
Undertake a SWOT Analysis
Acquisitions are more risky than organic growth. Be clear about what you need, and what you expect an acquisition to do for you, before investigating possible purchases. -
- What are your strengths? Can you complement them? Can you afford to risk diluting them?
- What are your weaknesses and how could you rectify them?
- Analyse your opportunities and how you might be able to take advantage of them.
- Assess the threats to your current position.
Having completed this SWOT analysis, you can assess the benefits and risks of an acquisition.
Benefits of an Aquisition
An acquisition can benefit your business by ;
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a. |
Providing opportunities to cross-sell to one another’s customers.
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b. |
Reducing costs - with a higher volume of activity, you should be able to achieve substantial economies of scale.
The increased size of your business should give greater negotiating power when it comes to purchasing.
- You should get better prices when buying in greater volume (bulk-buying). Ask your existing suppliers for quotes, so you can judge the potential savings.
- You may be able to negotiate better terms from your bank.
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c. |
Better use of overheads.
- savings in central functions, such as finance, administration and personnel.
- look for similar savings on premises, distribution, sales and marketing.
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Diversify your Risks
An acquisition could help you limit or offset the risks in your existing business. For example ;
- You may rely too much on one product.
- Some of your products may be coming to the end of their product life cycles.
- Could help you open up export sales, or reduce your dependence on just a few customers.
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e. |
Improving Management and Standard of Employees
Acquisitions are often most useful when they bring in new blood — intentionally or not.
An acquisition can fill gaps in your management team’s skills and experience. Be prepared to spend time with prospective partners, if you are planning to utilise their management skills. You need to ensure your methods and objectives fit together.
Are key staff willing to relocate ? |
Beware the Traps
If an acquisition is going to fail, it is usually because there was inadequate investigation beforehand, or no clear, agreed plan for what should happen afterwards.
Failure can be extremely expensive. Consider the possible pitfalls before making any move.
Your own business may suffer due to ;
- Your management may be tied up with the acquisition and overlook problems closer to home.
- You may well find you have increased your exposure to risk (for example, if you have borrowed heavily to fund the acquisition).
- You may have acquired assets you can neither use nor sell.
Be sure to allow for rationalisation costs when calculating the benefits you expect from any merging of operations.
- Ensure the sale and purchase agreement includes terms and conditions preventing the former business owners from setting up a similar venture again.
- It is particularly important to rule out a similar new business in close proximity to the one you take over. Otherwise you risk them winning back former employees and customers and regaining their market share.
Examine the Alternatives
An acquisition may often look like an attractive short cut to success. But you should also consider other routes to expansion.
If you are looking to expand distribution, rather than buying a company for its distribution network, contract it to do your distribution for you and get the benefits without the risks.
Perhaps a Joint Venture may be more appropriate.
- It is often cheaper to get out of a joint venture than offload a failed acquisition.
- A joint venture gives you access to the other party’s management and employee skill base, without the need to contribute to the overheads.
Growing your business by purchasing another is not as straight forward as it seems. There is more to it than going over the financial performance of the potential acquisition. We have assisted many clients in expanding their businesses. Please contact this office to discuss your situation.
The ATO has advised that their recent reviews indicate that some investment property owners are not keeping adequate records to support the income returned or claims being made in regard to rental properties.
Documentary records should be kept for both income and expenses relating to a rental property.
Records of rental expenses must be in English, or be readily convertible to English, and include the:
- name of the supplier of the goods or services
- amount of the expense
- nature of the goods or services
- date the expense was incurred, and
- date of the document.
If the document does not show the payment date, independent evidence can be used to show the date the expense was incurred, such as a bank statement.
Records of your rental income and expenses must be kept for five years from 31 October or, if a return is lodged after this date, five years from the date of lodgment. If at the end of this period there is a dispute pending with the Tax Office, all records must be kept until this dispute is resolved.
Capital Gains Tax
For capital gains tax purposes, records relating to ownership and all the costs of acquiring and disposing of the property must be kept for five years from the date of disposal. This is the case even where the property has been inherited, received as part of a divorce settlement or as a gift, or where improvements have been made to the property.
Please contact our office for more information.
Low Documentation loans are a flexible solution for self-employed people who have income and assets, but are unable to provide the required financial statements or tax returns at the time of application. The Australian Tax Office is concerned that small businesses using low doc loans may have tax compliance issues.
Initial investigations by the ATO suggest many people using these products had either understated their income or failed to lodge income tax returns.
Around 350 taxpayers were selected randomly from eight lenders to get a picture of the broader population using these products. This information was obtained using the access powers in the tax law. It identified failure to lodge tax returns as a primary concern.
Around 50 per cent of these people had not lodged returns – the average was three years outstanding.
The ATO has already taken action to enforce lodgement from these individuals, including eight court convictions. Most of these groups are now up to date and more than $1.3 million in tax has been raised. Prosecution action is continuing for those who have not yet lodged. They are also currently reviewing the accuracy of the returns that have been lodged.
In a second initiative the ATO undertook a risk based approach that showed that, for certain low documentation loan users, concealment of income is a significant concern.
These high risk cases were identified using Tax Office and other information including complaints made against some mortgage brokers to the Offices of Fair Trading. This led to the ATO focusing more closely on the clients of certain mortgage brokers. Around 400 high risk clients were identified.
140 of these were selected for the first round of audit activity. These cases were chosen because the broker involved was also a tax agent who had been identified as high risk as part of the ATO’s profiling of tax agents. The broker/tax agent was also subject to audit.
These audits raised over $23 million in tax and penalties.
In the coming year the ATO will systematically check the lodgement status of people obtaining finance through low documentation loans, and potentially other sources.
They will also continue to refine their risk profiling process to identify cases for audit action.
Although the findings indicate concerning levels of non-compliance amongst the users of low documentation loans, many users of these products are fully meeting their tax responsibilities. Many are funding repayments from legitimate sources like inheritances and capital gains, often derived from investments in property.
Where income has been omitted most of it has been derived from cash economy business activities predominantly in the building and construction industry.
If you have, or are considering using a Low Doc loan product, please contact this office. We can ensure that your records are up to date and tax compliant.
The ATO has advised that the FBT exemption on laptops and notebooks provided by employers to employees has been expanded to cover certain accessories.
From April 1, 2006 the following are exempt from FBT:
- Items that are ‘bundled’ by the retailer such as upgraded memory, an extended warranty or a protective carry bag. Please note that they must be presented on a single invoice.
- Internal products, eg modem and fax cards.
- Accessories for use with a laptop or notebook, eg portable printers.
- Pre-loaded software for laptop.
- Software purchased and used by the employee to undertake their duties.
Please contact this office for further information.
As you may be aware, in June last year the government released its policy document “Securing Australia’s Energy Future” (the energy white paper) announcing a major program of reform to modernise and simplify the fuel tax system.
From 1 July 2006, the government proposes to replace the Energy Grants Credit Scheme (EGCS) with a system of fuel tax credits. Businesses will be entitled to a fuel tax credit for diesel or petrol used for road transport in vehicles with a gross vehicle mass of 4.5 tonnes or more.
This proposal creates wider eligibility criteria than the current EGCS for which petrol use and certain metropolitan travel is ineligible. Fuel tax credit eligibility for non-road transport activity will remain similar to the EGCS with further expansion proposed in 2008.
Please note that the proposed fuel tax credit legislation will introduce claiming arrangements different to the existing EGCS arrangements. Businesses will need to calculate the amount of fuel tax credit owed to them and will only be able to lodge a claim on their activity statement (using the same reporting cycle as for their GST).
To claim a fuel tax credit under the proposed legislation, you will need to be registered for GST and will no longer be able to claim the fuel tax credit through integrated voice response or eGrant.
We will keep you up to date with this latest legislation as it moves through parliament.
Disclaimer:
The contents of this Bulletin are general in nature. We therefore accept no responsibility to persons acting on the information herein without first consulting us.
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