How exciting, you’ve seen a business for sale that you really want to buy but how do you know if it is a good buy?
Buying a business is probably one of the most stressful and hardest decisions you will have to make. It is comparable to buying a house. When you buy a house, you undertake location research, pest and building inspections, check the local schools and inspect the overall condition of the house. You spend countless days or even months making sure you have left no stone un-turned because it is a huge investment. The same should be done when buying a business and here’s why.
Buying a business is a huge investment. For many of us, it’s going to be the income generator to support the family. So why would you go into it without doing your homework first.
There are many factors you should consider and check before committing to a business – whether it be a franchise, small sole trader business or large business with payroll structure and employees.
Ask why the vendor is selling
This is most likely your first question before you go any further. The reason for someone selling a business is vital because it could affect the business’s future and your profitability. Are they selling due to family circumstances? Are they relocating out of the area? Or, are they selling because of a drop in revenue, a dispute with the landlord or dispute with another business?
Research the businesses place in the market
A good way to see if a business is going to be profitable for you is to look at it’s position in the market. Just as you would if you were starting a business from scratch, look at the competition, whether the market is flooded or not and it’s longevity. Is the business you are buying established and is it a leader in it’s market?
Look at the business’s reputation
Reputation is everything in business. Damage that and it is a long hard battle to build it back up again. Make sure the current owners haven’t damaged that in some way. Research how the owners are perceived in the business. Do customers like them? Do they have a good relationship with suppliers, stockists etc. Even though they won’t be the owners, their relationships with these people have formed overall opinions of the business and negative or tarnished ones are hard to break. Social media is a good place to look at a businesses reputation.
What are you buying?
Look at what you are buying in the selling price. Does the sale come with assets, a website, existing clientele, stock. Factoring this in will help you determine what it would cost you to build this business from scratch and ascertain whether it is a good buy. You will also be buying the profits and revenue, so make sure this is also considered in the price. You can calculate an approximate business selling price using a few methods, but most will factor in revenue over a year amongst other things.
A lot of people overlook this part when looking to buy a business. I agree, it isn’t the fun part of buying a business but it is a most important one. Consider what tax implications buying a business will have on your family income. Look at whether you will need to register for GST or whether capital gains taxes or stamp duty will be applied.
Are there any partnerships that will affect the buying/selling of the business? Look to see there haven’t been any partnerships previously that could come back to bite you down the track. There is nothing worse than a disgruntled business partner.
Looking over the books is a must. The best person to do this is an accountant. Your accountant will look for sales, profits, expenses and overall patterns in the business that could affect your profitability in the future. It’s easy to hide or fudge figures, but a good accountant will find these out for you. It is also good to look at the recurring business expenses that you will take ownership of such as trademarks, registrations and other business expenses.
Look at the business structure and if there are employees to consider. Make sure the employees will stick around after the sale. Make sure there is adequate income to cover wages, entitlements and other payments. Assess staff overall happiness. Is there a high turnover of staff or are they happy to be there.
Make sure there are thorough legal documents supporting the sale. Documents should be drafted by a lawyer and it’s best practice to have them viewed by your own lawyer as well. Ensure all assets and terms of the sale are clearly stated and that the agreement works for both parties. Also look for any debts or monetary liabilities, you do not want to be liable for these after the sale has gone through.
Make sure the owner sticks around
It is always good to keep open lines of communication with the seller of the business in case you need to ask questions or seek advice. A hand over take over period is a good way to adjust to the new business life and get to know the business from the person who built it.
As we have said, there are many factors to consider when buying an established business and each purchase will be different. There may also be factors that relate to your business purchase that we haven’t covered here.
If you need clarification on buying an established business in Australia, please contact us and we’d be happy to help. We also offer business health checks to make sure you are buying a solid investment.