Starting a business from scratch means having no customers,no processes, no assets etc, however on the other hand buying an existing business could mean the hard work has already been done. Alternatively, buying an existing business can also be a way of expanding a business you already own. In this guide we will look at what you must consider.
WHY should you consider buying a business?
There are many advantages of buying a business, which for some might be buying themselves a job. For example, if you bought a lawn mowing business with all the equipment you immediately start to earn income with existing clients. Your chances for success are greater as the business already has runs on the board. Even the process of asking for a loan will be easier as there is a known risk. Ideally, you will buy a business that is undervalued or has the potential to grow through your hard efforts.
There are also disadvantages, like the business was misrepresented by the previous owner, that could be turnover, reputations, debts, etc.
WHAT do you need to consider when buying a business?
It is critical that before buying a business you do your research carefully. The more information you have the better the decision. Unless you have the skills we strongly suggest you retain the services of at least a business advisor, accountant, or lawyer. The following steps may be helpful
Where the business is conducted through a company
- Do a company search to verify the vendor
- Are all ASIC compliance requirements up-to-date?
- Does the company have any overseas operations?
- Review the last four years’ financial statements for the business. Analyse liabilities, inventory, and accounts receivable and payable.
- Understand who currently owns the business such as shares, options, warrants as well as outstanding debt instruments.
- Review an up-to-date copy of the business’ credit report.
- Does the business have a loyal customer base? For example, subscriptions, loyalty programs, etc.
- Have you considered the financial projections and major growth drivers of the business in the next four years?
- What are the tax obligations of the business to be purchased?
- Have you obtained confirmation that all tax obligations – for example, income tax, GST, PAYG withholding, stamp duty, and payroll tax are up-to-date and paid?
- Obtain the last four years’ tax returns, including supporting schedules and work papers of the business, such as capital allowance schedules, business activity statements, fringe benefits tax returns, etc.
- Check if the business is currently being audited by the ATO or has been audited in the last four years and, if so, what the outcome was.
- Have you considered the stamp duty implications of the purchase of the business? (fees payable to the government associated with the purchase)
Assets that you are buying that the business currently owns
- Has a fixed asset register been obtained detailing all the assets being sold?
- Have you sighted the assets and condition of the assets being sold?
- Where assets are leased by the business, have you obtained copies of the leases?
- Are the assets adequately insured until the settlement of the purchase?
- Have you obtained a list of the employees, including their salaries and other entitlements?
- Do any employees have close contacts with customers that, if they were to leave, the business would be at risk of losing customers?
- Are there any key staff who would be imperative to the smooth continued running of the business? Considerations should include special skill sets or knowledge.
- Are you aware of all employment conditions, including key workplace agreements, incentive bonus plans, staff rotation policies, disciplinary procedures, etc.?
- Have all outstanding employee entitlements, such as superannuation guarantee and annual leave, been accounted for?
- Are the WorkCover premiums up-to-date?
- Does the current inventory include any obsolete stock?
- Has the inventory been valued at market value?
- Do you have copies of all real estate lease agreements, deeds, mortgages, and any documents relevant to the premises?
- If the same business premises are to continue, has the vendor facilitated a lease transfer to you?
- Do you know why the vendor is selling?
- Has the vendor attempted to sell the business before?
- Is there a documented business plan?
- How complex is the business? Do you have the skills required to continue?
- Are the business operations subject to any government regulations? If so, are all relevant government licenses, permits or consents up-to-date?
- Have you done a competitive analysis? Do you need a non-compete clause to stop the vendors from setting up in competition?
- Does the business have any pending or ongoing lawsuits or any recently finalised litigation cases?
- Have you searched the local council and other government agency records to ensure there are no plans or council orders that could disrupt the business or lead to a potential drop in sales?
- Have you identified the key customer and supplier contracts, and the likely impact a change of ownership might have on these agreements?
- Review the current production, distribution, sales, and marketing strategies (including websites and social media) of the business, and the likely impact of a change of ownership?
- Have you considered potential issues that could negatively impact the viability of the business (e.g. changing technology, trends, etc.)?
- Are there any intellectual property matters to consider? For example, trademarks, licenses, patents, etc.
- Seek advise on other questions you should answer
HOW do I buy a business?
Once you have completed all your due diligence and you want to move ahead its time to make an offer. Be prepared to negotiate. Once you agree you will need a contract. We strongly suggest you retain a lawyer in this process. The written contract ensures that both you and the seller clearly understand what each agrees to, for what cost, and what method of payment.
You should also understand what training will be needed and, if the original owner continues to work in the business, a specified period to do a handover.
As the last thought we suggest you:
- Make sure this is a business you want to buy
- Don’t assume you will not have to work hard yourself and you are buying a money train
- Have a clear vision and plan for the future
- Keep records of all conversations and all documents
- Do your homework
SUMMARY – Get help from a business consultant
Buying a business can help you grow quickly but be sure to follow some strict due diligence to minimise any nasty surprises. Your accountant or business advisor would be a good independent advisor for the purchase.