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Purchasing a business is a significant decision that requires careful consideration of various factors. One crucial aspect you should not overlook is the knowledge of business rates. Business rates are a form of property tax levied on non-domestic properties, including commercial premises and businesses. Understanding the implications of business rates is essential for potential buyers, as it can significantly impact a business’ financial viability and profitability. This article delves into the importance of knowing business rates when purchasing a business and explores the various aspects buyers should consider.
1. Understanding the Basics of Business Rates
Before exploring the importance of business rates, it is essential to grasp the basics. Business rates are calculated based on the rateable value of a property, which is determined by the Valuation Office Agency (VOA).
The rateable value estimates the annual rent a property could achieve on the open market. The local council then applies a multiplier, the national non-domestic rate (NNDR) or uniform business rate (UBR), to calculate the actual amount payable.
Business rates are payable by the occupiers or owners of non-domestic properties, including:
- businesses;
- offices;
- shops;
- factories; and
- warehouses.
2. Impact on Financial Planning
One of the primary reasons why knowledge of business rates is crucial when purchasing a business is the impact on financial planning. Business rates can form a significant portion of a company’s overhead costs, alongside rent, utilities and staff wages.
Understanding the potential business rates liability allows potential buyers to assess the financial feasibility of the acquisition. It enables them to accurately calculate the net profit margin and forecast the business’s future profitability. Ignoring or underestimating business rates can lead to financial strain and jeopardise the venture’s sustainability.
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3. Variations in Business Rates
Business rates in the UK vary significantly depending on the location and type of property. Different regions have different rateable values and multipliers. Accordingly, this leads to variations in the total amount payable. For example, London tends to have higher rateable values and multipliers than other parts of the country. Buyers must consider these regional disparities when evaluating potential businesses for acquisition.
Failing to account for variations in business rates can result in unexpected financial burdens or missed opportunities for more favourable locations.
4. Exemptions and Reliefs
While business rates can be a substantial financial obligation, knowing the potential exemptions and reliefs available is essential. Certain types of businesses and properties may be eligible for reduced rates or complete exemptions.
For instance, small businesses with a low rateable value may qualify for small business rate relief, which can significantly reduce the rates payable. Similarly, properties used for charitable purposes may be eligible for charitable rate relief.
5. Historical Business Rates
Another aspect that requires careful consideration is the history of business rates associated with the target business.
Obtaining information about the previous rates paid by the business can provide valuable insights into its financial performance and stability. Over time, steep increases in business rates indicate rising overhead costs and a potentially challenging business environment.
On the other hand, stable or decreasing rates suggest a more favourable situation. Buyers should request access to the historical rates information from the current owner or seek assistance from professional advisors to analyse the implications.
LegalVision’s Buying a Business: Guide to Negotiating Terms allows you to protect yourself by understanding which key terms to negotiate when buying a business.
6. Negotiation Tool
Knowledge of business rates can also serve as a negotiation tool during the acquisition process.
Potential buyers can leverage this information to negotiate a lower purchase price if a business has been struggling with high rates on its premises. Alternatively, if a property is subject to a rate reduction scheme or eligible for relief, buyers can use this knowledge to enhance the attractiveness of their offer.
Understanding the intricacies of business rates, and potential exemptions, such as small business rates relief, can provide buyers with a competitive advantage and lead to more favourable terms and conditions.
Key Takeaways
In conclusion, having up-to-date knowledge of business rates is crucial when purchasing a business. By thoroughly researching and considering these factors, you can assess financial feasibility, negotiate favourable terms, and ensure the long-term profitability and sustainability of the main property of the acquired business.
Many prospective business purchases obtain expert legal advice to ensure a complete understanding of business rates and other material factors used by local authorities in England, Wales, Scotland and Northern Ireland to set rates on commercial properties.
If you need legal assistance regarding business rates and business acquisition, our experienced business sale lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Yes, an expert lawyer can inform you about various exemptions and reliefs and the best way to provide the necessary evidence within the relevant application.
Local authorities collect business rates as a tax on business properties and usually use the monies to fund local services, such as waste management and emergency services.
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