What to know about buying a business

Buying a business is an exciting thing to consider and can be one of the biggest decisions of your life. But before you even start looking at the business, take a step back and consider whether owning a business is the right path for you. 

• Do you thrive on challenges? 
• Do you enjoy making, and being responsible for, your own decisions? 
• Does your family understand the impact that buying a business could have on them and support you unconditionally in your aim? 
• Are you prepared to take the risk of losing the money you invest in your business? 
• Do you have experience in the industry you want to enter? 
• Do you naturally look to streamline processes and methods when approaching a task? 
  

If this will be the first time you’ve owned and run a business, it’s worth asking yourself these questions:

• Would you be able to juggle every aspect of the business or employ staff to do this? From sales, accounting, admin, tax to customer service.
• Are you prepared to undergo training to develop the skills you need, or to get input from specialist advisers?
• Are you prepared to work long hours, possibly without the security of a steady income? 
• Have you considered what will happen to the business, and how it will continue operating, when you go on holiday? 

Answering no to any of these questions doesn’t necessarily mean you shouldn’t buy a business, but you should think carefully about whether it’s right for you.

While it can be rewarding to build a business from the ground up, buying an existing business has advantages.

If the business you’re buying is sound, it will usually come with an established customer base, systems and processes, trained staff, and an existing reputation and market position. When you’re building your own business, you need to develop these things from scratch – which means it typically requires more time and effort.

There’s a high chance you’ll need to borrow money or obtain some sort of finance to buy or grow your business. Buying an established business lessens the risk for potential lenders, because they know what they’re dealing with.

When you buy an existing business, you could be generating income from the beginning – whereas with a new business, it may take some time before income starts to flow through. You can also focus on growing the business from the start, rather than simply trying to ensure your business idea is viable.

The above benefits assume you’re buying a solid, well-managed business – but how do you know that’s the case? Use these guidelines to help ensure you have the information you need to make an informed decision.

To improve your chances of success, it’s important to undergo thorough due diligence. Doing a thorough assessment of the opportunities, potential risks or problems, and the value of the business, will help you understand the full picture.

Take a magnifying glass to the business’ operations, financial performance, legal and tax compliance, customer contacts, intellectual property, assets, and other details. Getting this process right can help assess its value and ensure you pay a fair price for the business. It will also provide essential information for your business planning.

Just like when buying a house, you should get a detailed list of exactly what’s included in the sale price. Don’t assume that anything is included unless it is written down in the sale and purchase agreement.

For example, check whether the price includes all physical assets such as plant and equipment, stock, premises and vehicles, and intangible assets (known as goodwill).

You should also review any existing contracts with suppliers, landlords, key customers etc. Review the duration of these contracts, whether the terms are fair, and whether there are clauses which could present problems in the future. In addition, make sure you ask for a comprehensive financial history of the business so you know what you’re buying.

The sale price of a business will also include intangibles, known as goodwill. It can be difficult to put a precise valuation on goodwill as it represents the potential future earnings that the business is likely to produce. It compensates the previous owner(s) for the work they’ve done to generate a profitable revenue stream, such as selecting the right location, hiring and training staff, establishing supplier contracts, developing a credible and trusted brand, and building a customer base.

Get advice on negotiating a price for goodwill (your accountant can help here) and be careful if future earnings are dependent on the existing owner’s abilities and rapport with customers. 

Some key questions to ask yourself are:

• Can the business really stand independently of the previous owner and their personality? 
• How much of the business’ potential would walk out the door with the departing owner? 
• Is the owner overvaluing the goodwill aspect of their business?

If a significant part of a business’ value is tied up in goodwill, consider whether you’d want to see a restraint of trade clause in the sale and purchase agreement. A restraint of trade clause can prevent the previous owner selling their business to you, then setting up in competition next door.

If you’re buying a business that operates from a specific location, check the lease for those premises. You should consult your lawyer and possibly a real estate professional to ensure the lease can be reassigned and the terms are acceptable.

It’s important to consider if the market the business is in, is entering a growth phase, or if it has stalled. Research as much as you can about industry characteristics such as customer demand, local and international trends, and technological developments.

You also need to know who your competitors are, what their prices are, what they are good at, and what they are bad at. This will help you assess the opportunities and risks and whether the business has a point of difference compared with competitors.

You may be satisfied with a business that will continue to deliver the same returns to you as it did the previous owner. However, most people look for a business that they can improve and grow. Consider whether there are opportunities to grow, such as extending premises, opening longer hours, exploring new sales channels, or targeting a different market.

You’ll also need to assess whether there are any major barriers to growth such as market saturation, location issues, policy or legislation, and changing consumer attitudes.

Get as much guidance as you can. Consider assembling a support network consisting of an accountant, experienced mentor, ANZ Business Specialist, and lawyer, who can give you specialised advice along the way.

You might be surprised at how much information you can gather by talking to business owners within your industry. Non-competitors in another location can be a great source of free advice.

It’s important to do your own research on the business you are buying, and not simply accept what the owner or business broker tells you. Check online feedback and blogs to see what customers think and see if there has been any bad press. Ask suppliers, customers, contractors; in fact, anyone who has dealt with the business in the past. 

Keep an open mind as you do this. Independent opinions – especially negative ones – will help you see ‘behind the curtain’, bring to light any issues that the current owner has glossed over, and give you a more accurate picture of the business and its reputation.

• Customers and suppliers – such as their level of satisfaction when dealing with the business, and if they experienced any major issues.
• Business systems – whether they are inefficient or poorly designed. This can be a major drag on a business and can be difficult, time-consuming, and expensive to address. 
• Equipment – check for old, obsolete, or poorly maintained equipment.  
• Staff – if they have the right skills, attitudes, and values. 
• Stock – look out for out of date or old stock that may be hard to sell.

Consider if the business will provide you with a salary you can live on. If not immediately, will it in the future? Ensure you have sufficient funds to tide you over until it does. 

It’s important to have an exit strategy or a plan in place if things don’t go to plan. Create a ‘worst case’ scenario game plan and make sure it’s something you could live with if it all goes belly up.