Buying a Caravan Park

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1 Buying a Caravan Park A comprehensive guide covering the issues you need to know when buying a caravan park in Australia rogerson kenny business accountants address: Suite 13, 241 Blackburn Road, Mount Waverley, Victoria, Australia, 3149 postal: PO Box 323, Mount Waverley, Victoria, Australia, 3149 phone: phone: fax 2533 : fax +61 :

2 As accountants, we are your trusted advisors, working only for you and in your best interests. As specialist Caravan Park Accountants, Rogerson Kenny Business Accountants have a wealth of industry knowledge and experience in buying and assisting Caravan Park owners in operating or selling a Caravan Park. As members of the Victorian Caravan Parks Association for many years, our intimate knowledge of accounting specifically for Caravan Parks means our clients have come to rely on us for all aspects of Caravan Park accounting. We have worked with many people from the beginning of their quest to own a Caravan Park, which includes all their personal considerations, guiding them through the purchase process and of course, providing them with ongoing accounting and business advice. From their very first considerations right through to the purchase and, of course, ongoing accounting and advice for their Caravan Park, we ve been by their side helping them make informed and financially smart decisions as their dreams become a reality. We wanted to share our accumulated knowledge with those considering buying a Caravan Park, so we put our heads together and wrote this comprehensive guide to buying a Caravan Park. We highly recommend you read and keep this guide on hand as a reference throughout your journey to purchase a Caravan Park. Don t forget, we urge you to use our expertise when looking to buy a Caravan Park. We are happy to be your first port of call and we can help you establish your likely borrowing power and advise on the best business structure for your needs, as well as answer any queries you may have about the industry. Mark Rogerson Peter Rogerson Rob Deayton 2

3 Table of contents What are you buying - Freehold Going Concern or Leasehold Business? - The pros and cons. p.4 How is a Caravan Park valued? a. Leasehold Business b. Adjusted Net Profit c. Freehold Going Concern p.6 Things to consider when buying a Caravan Park p.7 The Role of the Accountant and the Due Diligence Process p.8 The Role of the Broker p.10 The Role of the Banker p.11 The Role of the Solicitor p.11 Obtaining Finance to buy a Caravan Park p.12 Types of Business Structures a. Sole Trader b. Partnership c. Company d. Discretionary Trust (aka Family Trust) e. Unit Trust p.14 Making an Offer on a Caravan Park p.23 3

4 What are you buying Freehold Going Concern or Leasehold Business? the pros and cons There are two ways you can buy a Caravan Park. You can buy just the business or you can buy the freehold and business together. You may be familiar with the terms Leasehold Business and Freehold Going Concern. These terms are used to describe what type of Caravan Park you are buying, be it the freehold and business the Caravan Park is on (the Freehold Going Concern) or the actual business without the freehold (known as the Leasehold Business). purchase of a caravan park freehold going concern: A Freehold Going Concern is where you buy the freehold and business together. This includes buildings, plant & equipment and goodwill. A Freehold Going Concern is usually much more expensive than a Leasehold Business and such a purchase is typically by more experienced operators on their second or third Caravan Park venture. Mostly it comes back to your experience and the ability to finance such a purchase. Pros of a Caravan Park Freehold Going Concern (land and business together) Cons of a Caravan Park Freehold Going Concern 1) You are the landlord and the tenant, thus master of your own destiny. You will not have any disputes about buildings, repairs, leases etc and can make changes and upgrades for your benefit. 1) If you want to sell the Freehold Going Concern (business and freehold) together, this could limit potential buyers due to the size of the transaction (ie. the finance and equity requirements). 3) No set or diminishing lease and ability to issue a new and long lease (if you want to sell the business and keep the Freehold). 2) The size of the investment is large and if for some reason the turnover of the business decreases then, the value of your freehold will most likely also decrease. 2) Improvements made to the park are yours. 3) Stamp duty is payable when you buy. 4) You have options when selling be it just the Leasehold Business or the Freehold Going Concern business. 4

5 Purchase of a Leasehold Caravan Park Business Most first time buyers acquire a Leasehold Business only as cost and finance requirements are obviously less, and it gives you a chance to determine if you like the industry before you consider the extra cost of acquiring freehold. The main aspects to consider with a lease is the location, length of lease remaining (anything under 20 years, we start to discount the value of a business, 22 years up to 30 years will command a premium) and the percentage of rent that is charged (22% to 25% of accommodation turnover is reasonable). Further, there may be stamp duty on a leasehold only when buying, so please be careful to check with either the broker or solicitor (ultimately) when considering a business, as this varies state to state. A lease will typically be in 3 year blocks with options on top of it (intial lease period of 3 years, with 3 x 5 years options = 18 years). This means at the end of three years, you can walk away. The lease is what you have to sell and the longer the lease the better. If you buy a lease at 18 years, then you need to have some level of comfort that the landlord will extend the lease so you have something to sell. Otherwise, your options are to operate the business for 18 years and then walk away or sell it after a certain period for a discounted rate. If you sell after 8 years, a person buying a 10 year lease only has 10 years to pay back any loans and make an appropriate return on the investment. The term of the lease can be extended in a variety of ways. You may have a great relationship with the landlord and if you have been a good tenant they may agree to extend the term of the lease for no cost. You could also offer to carry out capital improvements like new roads, a toilet block (which is usually at the expense of the landlord) and in return receive further option periods. It is advisable for your solicitor to be involved in lease extension discussions. Pros of a Leasehold Caravan Park Business 1) The level of investment required is reduced, and is matched to the performance of the business. You are buying the goodwill of the business, fixtures and fittings, etc the landlord wants you to succeed to keep the value of their investment up. Cons of a Caravan Park Freehold Going Concern: 1) You are at the mercy of the landlord. A big part of the business when selling is how many years are left on the lease, as whoever buys your business needs to be able to pay off their investment, build the asset and sell again. The longer the lease, the better the sale price. We usually commence discounting the value of a business with any lease under 20 years. 2) If things go bad, then you only have the leasehold to worry about, not the freehold as well. 2) When selling the Leasehold Business, the landlord will usually have a say and can request details of the new purchaser. The landlord can object or have reservations and make the process difficult. 3) It is possible to expect a 25% to 30% return on your leasehold investment (compared with 10% to 15% for a freehold). 4) It is much easier to sell the leasehold, there are more buyers with a leasehold budget! 5) It can be a great way to dip your toe in the water and see if you are cut out for the life of a parkie! Tip: We recommend you join a local association for Caravan Park owners and operators. In Victoria, the Victorian Caravan park Association hold an annual conference and provide a support network. Get to know and learn from your fellow Caravan Park operators. 5

6 How is a Caravan Park Valued? Our job as accountants when our clients are looking to buy a Caravan Park business is to make sure they are receiving value for money. We are making sure the asset they buy is at a fair market price based on the current figures with which we work to verify. There are different ways a Caravan Park can be valued and different methods depending if it is a Leasehold Business or a Freehold Going Concern you are buying. The variables that go into valuing a Caravan Park can include adjusted net profit, location, lease terms, demand, condition of property (and the need for repairs), condition of plant & equipment, etc. how is a caravan park leasehold business valued? Our job is to give you and the bank comfort in what you are buying. For a Caravan Park Leasehold Business we take into account the term of the lease, location, clientele, state of the park ie. Repairs that need to be done and the like. Obviously we spend considerable time doing a due diligence on the figures (which means we check and verify to make sure the turnover and expenses are accurate) and arrive at an adjusted net profit figure. We then apply a multiple based on the above factors (lease term, location etc). The multiple of adjusted net profit is usually between 3 and 4 times, but an experienced eye is needed to add back expenses and take out irrelevant income and arrive at an adjusted net profit figure. The location, term of lease, state of the Caravan park etc is then taken into account. There is not one formula that fits all. Our job is to give you and the bank comfort in what you are buying and challenge the broker and vendor on anything that we consider unreasonable. what is adjusted net profit? There are many formulas, benchmarks and calculations we do to arrive at what is called an adjusted net profit. The adjusted net profit gets back to the raw profit of the business (basically deleting expenses that are not relevant to the business eg. owners superannuation, excessive motor vehicle expense, depreciation, interest expense and the like and taking out income that is not relevant eg. interest earned). This allows us to compare apples with apples. Add backs are often the most challenged item when purchasing a Caravan Park Business as it can be up to interpretation. That is why an accountant who is experienced in the operations of Caravan Parks will give you their opinion and request further information on items added back or not added back. Roughly, for every dollar added back, profit is increased at between 3 and 4 times. We supply the science and you need to supply the art. how is a caravan park freehold going concern valued? A Caravan Park Freehold Going Concern is much the same as above, except we use a few more valuation methods, including a return on investment formula. This basically just increases the checks and balances. The value of a Freehold Going Concern is not typically done on a multiple of adjusted net profit, but as a return on investment. This figure will depend on location, state of the park and the like. Like any asset you buy, be it a house, investment property or in this case a business, it is only worth what someone is willing to pay for it. We supply the science (piece of mind regarding the figures etc) and you need to supply the art. Together, you form an offering price you are comfortable with and the negotiation begins. 6

7 Things to consider when buying a Caravan Park below is a list of things you should consider or tick off before you purchase: Why is the vendor selling? How long has it been on the market? What is the competition? History of the business (has it been successful or had four owners in 5 years)? Is anything changing? Newer Caravan Park in the area? Is local council revoking a permit? Is a major event in the town leaving? Staff profiles, managers, and anything you need to know. Do they know about the sale, would anyone be likely to leave? You should also check employee entitlements (sick leave, holiday, long service leave, unpaid super etc) that may be outstanding or falling due. plant & equipment Plant and equipment vary significantly and as you assess Caravan Parks, you will develop an eye for what is on offer in the price. Cabins, tennis courts, games rooms, internet facilities, automated booking systems and toll gates, swimming pools, lawn mowers, tractors, laundry equipment, hot water units and the like are all aspects of the Leasehold Business or Freehold Going Concern you need to consider in terms of their value and operating condition. You don t want to find unexpectedly significant repairs or replacements to plant and equipment you hadn t budgeted for because you didn t do your homework properly. If you were to buy a leasehold for $500,000 and plant and equipment was valued at $200,000, then $300,000 would be the value of the goodwill. The split of the goodwill and plant & equipment of the purchase price is important for tax time. The higher the value of plant & equipment, the better the depreciation deduction (goodwill cannot be deducted and just sits on your balance sheet). The value of plant & equipment and goodwill needs to be included in the contract of sale. You need to make sure that there is no equipment under lease. If there is then usually the vendor pays out the residual value owing so that you get title to the equipment at settlement. If you agree to take over the lease then the purchase price needs to be adjusted. The aim of buying a Caravan Park business is to improve it and thus grow the value and prepare the business for sale (even though this may be several years away). A good indicator of the potential of the business is to look at the statistical information, namely occupancy rates. If occupancy is 50%, you may have an underperforming business and this can present an opportunity to develop and improve the business. If occupancy rates are already at a high level your actions over a period of time may be to: 1. Review tariffs overall and maybe a surcharge at peak holiday times 2. Increase the number of cabins or sites available 3. Determine any other income streams that may be appropriate The tariffs charged will also be a good indicator of potential. There may be room to simply increase tariffs, or decrease to attract more clients. These can be applied to the different sources of income eg. 1. Cabins can be divided into the various sources available, eg. Deluxe, standard etc 2. Powered sites 3. Unpowered sites. 7

8 The Role of an Accountant and Due Diligence Process The role of the accountant when you are buying a Caravan Park is critical in determining that a fair price is being paid. The accountant is effectively an employee of the purchaser, working in your best interests. We encourage you to make contact with an accountant right at the initial stages of when you are considering the purchase of a Caravam Park. It may be to talk about your options, Freehold Going Concern or Leasehold Business, to gain an indication of how much you could borrow and basically where to start. We suggest making early contact, as you then can go and deal with the brokers with confidence, knowing what you are looking for, your price range and you can work on types of caravan parks, areas (inland, coastal, permanent, recreational), etc. The accountant can also give you an idea of your borrowing capabilities, further enhancing the relevance of your first dealings with the business broker. Often, it can take some time before you find a Caravan Park that you are happy with. In some cases, a park may look great, yet the commercial reality for your situation means it won t work. This is something that will arise in an initial review process. This is the process where we access the brokers information booklet on the business, ask questions, prepare a draft adjusted net profit figure, etc. We will also talk to the bank to obtain an informal idea of their lending levels, look at what type of entity may be appropriate and engage a solicitor. Once the review has been completed, it is time to make an offer. As stated, a solicitor will be involved in this offer making process and the offer should be made subject to conditions (such as obtaining finance, satisfactory due diligence etc). We will provide you with a high and low price range, so you can start the negotiation (see Making an offer on a Caravan Park page for more information). Once an offer is made and accepted a formal and thorough Due Diligence process begins. The Due Diligence process will ensure the figures are correct to determine that what you are buying is supported by actual figures. The process in part verifies income, by tracking this through BAS statements and bank statements, major expenses are also verified by checking invoices etc. Further to this, we use industry ratios to make sure expenses relative to income are within reasonable limits. If not, we investigate further. Often, rent as a percentage to income (if you are buying a Leasehold Business) may be outside what we would call normal. This may not mean that the rent is too high, it could indicate the turnover is too low and thus provide an opportunity. War Story: we were completing a due diligence and tracing sales figures through the bookkeeping program, matching them to the BAS and then reconciling them to what was being banked. There was a discrepancy! It turns out the owner was moving money between the main business bank account and a high interest account. His bookkeeper was recording the movements back into the main bank account as income (whoops) and as such profit and turnover was inflated by a considerable amount. This immediately wiped about $60,000 off the value of the business good win for our client! Once everyone is happy with the Due Diligence, and queries have been answered, a finance application with the bank is the next step. The finance application will involve the accountant and needs to be professionally presented with forecasts, contract, lease, titles, available equity, a business plan and the like to satisfy the bank that you can take on and service the debt. Your experience, presentation and professionalism (along with your engagement of professionals) comes into consideration and forms part of the overall finance application. Once finance has been approved and the conditions of your offer have been met (see Obtaining finance to buy a Caravan Park page), your solicitor will kick into gear and have everything moving, regarding the documents to be signed, involving the bank when appropriate for settlement and so on. It is at this point that the real work of running your own Caravan Park starts 8

9 what is the ongoing involvement of the accountant? The future involvement of the specialist Caravan Park Accountant is just as important as the initial involvement of the Accountant when buying the Caravan Park. This is because the books and records will be always prepared in a fashion ready for sale (thus making you seem as professional as possible). When it does come time to sell, that same Accountant will make sure you receive your best possible sale price. Leading into a sale and through the whole relationship, the Accountant will be your guide. You need to keep the dialogue open and discuss any improvements, acquisitions and ideas and the impact that these may have on tax, sale price and the like. Conversely, a specialist Caravan Park Accountant will also keep you up to date with changes that impact on you and your industry, so you can plan for these and take advantage of any opportunities that may come your way. An example of advice a specialist Caravan Park Accountant may give you would be, if you buy a new cabin and sell the business a year later, you may not receive any extra money for having that new cabin in the sale price. This is because the only impact the cabin would have on the sale price is an increase in its turnover and thus an increase in profit (but because it is so new, this may not yet have had an impact). For clients who have an exit strategy (average 7 years), the best time to make capital improvements is in the first year of operation, so you are able to claim the maximum depreciation deduction and improve the value of the business off the back of better turnover (and hopefully) profit figures. The ongoing role of the Accountant (ie. after the business has been purchased) can be summarised in the below dot points Assist with bookkeeping requirements + Include recommending appropriate bookkeeping software + Product train if need be on the bookkeeping software + Provide feedback and ongoing support / assistance on your file tax Office & other Government compliance reporting (your bank will also want timely copies of these) + Yearly Tax Returns + Financial Statements + BAS Statements + ASIC Reporting (if required) tax Planning + Planning for and minimising future tax Forecasting + For planning on capital expenditure, taxation, purchase of plant & equipment etc + Forecast the feasibility of new investments + The bank may want to see forecast figures, especially if you want to increase your borrowings Ongoing Discussions + All aspects of the business need to be constantly evaluated and reviewed + You may have the space and thus want to invest in new cabins. Can you do it? How will you afford it? What will the impact have on turnover, profit, tax and the sale price? This is a common question we are asked. Often, we will then prepare a forecast and present this to the bank with an application to finance this purchase Planning for Sale + When it is coming time to sell, we can assist you and your broker by providing quality financial statements, prompt answers to questions, full depreciation and asset listing reports, adjusted net profit figure (after adding back owner specific expenses), and information to obtain the best possible price. 9

10 The Role of the Broker The broker is the link between buyers and sellers, much like a real estate agent. There are specialist brokers that deal in the Caravan Park industry and general business brokers that will sell anything from a milk bar to an engineering business. Before you see a broker, we recommend you see us (an accountant) to understand what you can borrow and what your price range may be, where the equity is you are going to contribute (and how this will work), the type of Caravan Park you want to buy (Freehold Going Concern or Leasehold Business) and basically have a discussion with an independent professional. From here, you will be better informed when you make contact with a broker and start your search. The broker will act as the conduit between you and the vendor. They will have a lot of answers to your questions and will deal extensively with the accountant as well. Specialists know the industry and typically put a fair price on the Caravan Park if it has a justified reason behind it. Often it is about understanding the reason in order to understand the price. the role of the Broker The broker should provide you with a detailed profile of the business for sale. This should include: The offering + What is for sale, how much, the address, terms / method of sale The history of the Caravan Park The reason for selling Layout of Caravan Park Operating hours, tariffs, occupancy percentage Source of goods, main suppliers, terms of trade Photos the more the merrier! Competitor analysis and market ie. Holiday makers, workers, permanents etc. Three years profit and loss statements From the vendors accountant, not from the vendors bookkeeping software Adjusted Net Profit addback + the broker should detail what has been added back (and any income taken out that is not relevant) particulars of the Caravan Park + Number of sites, cabins, facilities, managers residence Plant & Equipment List (with written down values or market values) Details of the lease (if applicable) + Amount, terms etc. All lease contracts will have to be checked off by a solicitor before you buy The broker is the first port of call for your queries and the accountants queries and are the best initial source of information they often know much more than what is on the website or in the information book. Further, your relationship with the broker is paramount, as you may not buy the first business you look at, and when it comes time to sell, you may want to use that same broker. Our opinion is the price needs to be fair to all involved and this will reflect when it comes time to sell. The broker will also have you sign a confidentiality agreement before any information is handed over. They may also refuse certain information until you make an offer for the business. 10

11 Tourism Brokers We sell Motels, Caravan Parks, Management Rights, Hotels & Licensed Premises John Warren Director - Sunshine Coast David Head Director - Tamworth Michael Philpott Director - Sydney Warren Sweetman Forster Peter Middlebrook Bowral Debbie Nicholson Pacific Pines Robert Nicholson Pacific Pines Gerard Dixon Merrimac Tony Johnson East Brisbane Reg Partington Melbourne Barry Bolwell Echuca Peter Gay Wangaratta Glenn Warren North Lakes Mike Herringe Curl Curl Seng Lim Chinese Liaison

12 The role of the Banker It is important that your banker has knowledge of the industry. In most cases, you are going to require the services of a Bank, to either obtain finance for the purchase, working capital, hire purchase, leases or some form of improvement or expansion to your Park. It is important that your banker has knowledge of the industry. This will assist your finance being approved. A local bank manager most likely will have no idea of industry norms or past deals financed and will be taking a cautious approach. It is best to use an experienced banker who knows the industry. We can introduce you to a specialist Caravan Park banker. The Role of the Solicitor The solicitor will come in to play when it is time for you to make an offer. The solicitor will come in to play when it is time for you to make an offer. Our suggestion is you must use an experienced solicitor that is familiar with Caravan Park transactions. Typically an offer is made subject to conditions, such as finance, due diligence and legal approval. The solicitor will check the contracts, the lease, check permits, titles, understand or be aware of local government acts, rules and regulations etc. The solicitor will deal with the broker, accountant, vendor's solicitor and most likely the bank' solicitor. 11

13 Obtaining Finance to buy a Caravan Park In most cases when buying a Caravan Park you are going to require the services of a bank, to enable you to finance the purchase and provide you with sufficient working capital. At a later date you will most likely require finance to purchase plant & equipment, cabins etc. You must realise when you start a business that on day one, there is no money in the bank. You must pay for wages, light and power, fuel, repairs and the like and this will take months, even up to a year to have built up a normal trading war chest in the bank to fund such things. That is why you will need working capital and this needs to be considered when calculating your finance requirements. It is also worth considering when thinking about finance, just how much you need (It is important to understand that to buy either a Leasehold Business or Freehold Going Concern, you are going to require more than a 10% deposit). There may be stamp duty, legal costs, accounting fees, business entity establishment fees, stock, deposits, working capital, etc. This information will be determined with forecasting by an accountant and will allow for tax provisions, loan repayments, asset replacements, deposits, stock, stamp duty (if applicable), borrowing costs, initial accounting & legal fees, business entity establishment costs and thus give a figure for your working capital requirements. If buying a leasehold business, the banks are going to require equity of approximately 50% of the purchase price and approximately 30% equity for the purchase of a Freehold Going Concern. In conjunction with an Accountant, you will need to put together a finance application. A finance application should include the following: 1. past three years financial information and income and expenditure projections for at least the next 12 months 2. contract of sale 4. copy of the lease 5. financing requirements and how these have been determined 6. available equity and a list of personal assets and liabilities 7. personal details regarding business experience etc 8. details of structure to buy the business (ie. If a trust, the trust deed, if a company the certificate of incorporation and relevant constitution and if a partnership, evidence of an agreement) 8. details of business plan which would include an overview of the business, what you plan to do and by when (including marketing ideas), likely outcomes of these plans, staffing requirements, etc 12

14 To Summarise, for any transaction, the bank will look at four main elements in a commercial transaction: 1. management: Do you have industry experience and / or what is your business experience in general (have you owned a business and what were the results?) 2. equity: The bank like to see as much skin in the game as possible. The bigger the financial commitment, the more comfort the bank has in the deal 3. cash flow: The bank will want you / the business to have the ability to repay the loan 4. security: It is all a question of risk. The bank will lend against the business up to a certain percentage and the Freehold up to a certain percentage. They will require either cash or security to make the rest of the deal work. A well-executed finance application to the right banker will be accepted more often than not. In most cases, the Accountant will have an informal conversation with the banker on your behalf before things proceed too far. If it is a borderline case, the Accountant should determine what the banker will need in order to help get the deal over the line. If the deal is out of the ball park, the Accountant will let you know and give you price parameters to work with for future Caravan Park opportunities. The banker has two objectives. The first is to lend money to the right borrower. The second is to make sure the risk is within their parameters. Every banker will need to submit their own application internally up the line to a credit team, who ask questions and either approve or don t approve. So, if you have a well presented application, meet the parameters (which the banker and accountant will work within) then the deal should be approved. what is a cash flow forecast? The aim is to throw everything into the pot,.. A Cash Flow forecast is a build up of figures from the prior periods profit and loss statement and balance sheet. The aim of the cash flow is to work out cash receipts expected and cash payments to be made on a month to month basis. The cash flow will include all payments relevant to you (the potential new owner). The aim is to throw everything into the pot, including owners drawings, loan repayments, tax and GST payments and the like and see if the cash receipts outweigh the payments. It will also help to determine working capital requirements at the start of operations and take into account any seasonality (as the cash flow forecast is broken down into months). Tip: Even if you are not seeking finance from a bank, cash flow forecasting is a great tool for your business management. 13

15 Types of business structure There are different types of structures to operate your Caravan Park in. No one situation is the same and you really need to consult an accountant to determine the best structure. It is often unlikely you will find the perfect structure, so you will need to make a decision in conjunction with your accountant as to your best fit. Some issues to consider when looking at a structure are: asset protection, costs, capital gains tax benefits planning for when you sell, if you are buying a freehold do you hold in a separate entity than the leasehold?, as well as tax and succession planning. It is vital to have the right structure in place from the beginning. Moving structures will often not be viable due to stamp duty, legal fees and possible capital gains tax. Moving a business from one structure or entity to another is effectively a sale and costs money. People who don t seek advice for the right structure could be trapped and paying much higher tax, not have succession flexibility, could risk their personal assets and have a nasty surprise when they sell (eg. Capital Gains general discount doesn t apply) and so on. Make sure you get it right from the start. Sole trader What is a Sole Trader? A sole trader is a single person operating a business in their own name, e.g. John Jones. They can register a business name, such as "Foreshore Caravan Park". While operating a business as a sole trader provides freedom and autonomy, this business structure can also present risks to your personal finances. Operating as a sole trader has one important disadvantage and that is that the operator's liability is unlimited. If a problem arises, creditors of the business are able to make you totally responsible for all debts. This affects your personal assets and in a worst case scenario will send you bankrupt. Below are the advantages and disadvantages of being a sole trader: Advantages of a Sole Trader Low establishment fees. Simple business structure and documentation. Full control over business decisions. The sole trader enjoys all profits and capital gains. It is easy to wind up this type of business. Taxation advantages exist when profits are low. Other than the Income Tax Assessment Act and contract law, no specific legislation applies. Disadvantages of a Sole Trader Your capital will be limited by your personal assets. Expertise may be limited, and there is no one else to share the workload. Unlimited legal liability. Personally responsibility for all debts and liabilities. It may be difficult to pass on ownership, making the business hard to sell if the proprietor dies or experiences a change in circumstances. Taxation disadvantages exist when profits are high. liability As a sole trader, you own the assets of your business and are responsible for its liabilities. Liability is unlimited and can extend to your personal assets, including your share of any assets that you jointly own with another person. 14

16 Partnerships What is a Partnership? A partnership is formed when two or more people (up to 20) go into business together with a view to making profit. As with sole traders if the partners are operating under their own names there is no need to register but they must register a business name if they have one. A partnership has its own Tax File Number (TFN), and an Australian Business Number (ABN) and lodges its own, separate tax return. There is also no legal requirement for a written agreement, although it is better if there is a document that sets out the full extent of the relationship between the partners. This document can be costly and detailed, depending on the relationship of the partners and many other factors. Advantages of a Partnership Partnerships are not expensive to set up (apart from the partnership agreement) and you have access to more capital You have pooled knowledge, experience, skills and ability to take time off There are certain tax benefits where the partners are in the same family, such as husband and wife Disadvantages of a Partnership As the business develops personalities may clash and there may be disputes over administration and profit sharing Partners can be individually and collectively liable to the defaults of other partner(s) If a partner decides to dissolve a business, it may effectively end the business partnership agreement Although partnership agreements can be verbal; we recommended a written partnership agreement be prepared with the input of all partners and the advice of a solicitor. Some of the matters that need to be covered include: the nature of the business the role and authority of each partner proportion of ownership of each partner each partner's liability to contribute funds the manner of dissolution the distribution of assets on dissolution the resolution of disputes If you're planning to use a business name, register it with Consumer Affairs Victoria (CAV) or local business registration branch. Limited partnerships and incorporated limited partnerships must be registered separately from the business name with CAV (or your state business name register). General partnerships, also referred to as 'partnerships', do not need separate registration. 15

17 Company What is a Company? A company is an independent legal entity able to do business in its own right, sue and be sued. It also is its own tax payer. The shareholders own the company, and directors run the company. The directors of a company can be shareholders. Company employees can also be shareholders. The most popular entity for a small business is a private company. The private company need only have one director and shareholder. The company is a separate legal entity, which is not subject to a time requirement relative to being wound up, such as a Discretionary Trust (see below) which must be wound up after 80 years. Advantages of a Company Shareholders of the company are only liable for the money they owe on any shares they own and/or for any amount of money they guarantee to contribute upon winding up of the company A company can be owned and operated by one shareholder and director Directors, managers and employees have no personal responsibility for debts unless they caused the debts recklessly, negligently or fraudulently Limited liability can make it easier to attract investment A company can own property Asset protection Disadvantages of a Company A company can be expensive to establish - you must register with the Australian Securities and Investments Commission (ASIC) A company and it s directors are regulated by The Corporations Act However, this can be a good thing and will often achieve the same result as a partnership agreement Companies may attract higher compliance costs than other business structures Company tax is payable Shareholders may have difficulty recovering their investment due to limitations on who can buy shares Capital gains tax 50% general discount doesn't apply taxation A company is subject to taxation in it's own right, and this is usually paid quarterly to the Australian Taxation Office. Shareholders receive a credit towards the tax on dividends equal to the relevant amount of tax paid by the company. A company pays income tax on it's profits, this general rate is 30%. liability Due to limited liability, a company structure may be advantageous to a high risk business. However, major creditors may require directors to personally guarantee the company's liabilities. Personal liability of directors and employees can also arise if they commit an offence under the Corporations Act 2001, or are found to have negligently performed their duties. A company can sue and be sued in it's own right. 16

18 Discretionary Trust (AKA FAMILY TRUST) What is a Discretionary trust? Discretionary Trusts are a very popular way of conducting small business operations in Australia. There are a number of persons who participate in the formation and operation of the trust. These can be summarised as follows: "Settlor" "Trustees" This is the person who establishes the trust and normally contributes a small amount of money to the Trustee for the benefit of the beneficiaries of the Trust. The Settlor should never be a beneficiary or a Trustee of a trust. The Trustees are responsible for all aspects of the day to day management, investment of monies etc., relating to the trust. The Trustees can either be a Company or at least two individual(s). The Trustee has extremely wide legal and trust responsibilities for the administration of the Trust. Advantages of a Discretionary Trust Tax minimisation - profits can be sent to beneficiaries of the trust, which can differ each year Disadvantages of a Discretionary Trust More expensive to operate than a sole trader Ease of succession Asset protection tax and income implications Rather than shareholders, a trust has beneficiaries who are entitled to distributions of capital and/or income. These distributions are controlled by the trustee and form part of a beneficiary's personal income, subject to income tax and PAYG installment tax. 17

19 Unit Trust What is a Unit trust? A Unit Trust is another way of conducting business operations. It is normally used as an alternative to a Partnership, especially where there are people involved on an "arms length' basis in the business entity. Each member of the Unit Trust would have a set allocation of units in the Unit Trust, which is reflected in the control percentage of each unit holder in the trust. A Unit Trust also has Trustees and may have a Settlor. Advantages of a Unit Trust Tax minimisation in very limited cases Ease of succession Great way for non related parties to do business together Disadvantages of a Unit Trust Unit trusts can be a complex and expensive business structure Subject to higher compliance costs Can be difficult to dismantle tax and income implications Rather than shareholders, a unit trust has unit holders who are entitled to distributions of capital and/or income. These distributions are controlled by the trustee and form part of a beneficiary's personal income, subject to income tax and provisional tax. The difference between a Unit Trust and Family Trust, is that the beneficiaries have a fixed entitlement as unit holders. 18

20 Making an Offer on a Caravan Park Together we can work out how to begin the negotiation. Once we (as your accountant) have completed a preliminary review of figures and documentation, queries have been answered, you have received a positive initial response from the bank, the solicitor has checked the lease, we will discuss with you an appropriate price range for the business in question. We will discuss with you how this relates to the asking price and together we can work out how to begin the negotiations. Once you have a price you are comfortable with and everything else is in order (or getting there), you can make an offer. It is common practice to make an offer subject to finance, due diligence and any other conditions that may be relevant. In the course of making an offer, you and the vendor will ultimately need to agree to the following: the price You will need to agree on the price to be paid for the business and the amount of deposit required. stock If stock is involved, the value of this will be determined by a stocktake on the day of settlement. an adjustment will need to be made for fees received in advance (this should be completed as part of the statement of adjustments) Imagine a Caravan Park where 90% of the revenue had been collected in the first month of the year, you take it over and thus have no cash flow as the prior owner has taken revenue that hasn t yet been earned this is your revenue! agree on some training time, especially if this is your first caravan park This could be either before or after settlement. agree on the settlement date This allows for finance to be obtained and everything to be tied off. This could take two weeks to a few months. there may be other clauses you or the vendor want included and these are to be negotiated. don t be pressured into making an offer by the broker Often, the broker will want to create a sense of urgency for the sale. Do the preliminary review and make sure you are armed with your facts and figures to enable you to make an informed decision. War Story: Any revenue the vendor has received in advance is included in the statement of adjustment. This is your money and which the vendor hasn t yet earned (even though it has been received). If this isn t taken into account you will have a business without cash flow for the first year and it could create financial difficulties. 19

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