The Australian Bureau of Statistics has reported that the small business make up 96 percent of all businesses. Based on this statistic, it is clear that being your own boss is a dream harboured by many Australians. However, establishing and running a successful business is easier said than done.
Fortunately, you don’t have to go down the route of trying out various businesses to find out which one works for you. The easiest way to set yourself up for success is buying an already existing business. The following is a checklist for buying an existing business is Australia.
1. Understand the Important Factors You Should Consider
You must consider many different factors when buying an established business, which include:
History of the Business:
You need to find out what has worked for the current owner in the past and what has not. You need to ask this question before buying the business so that you know what you shouldn’t do once you take over.
You also need to find out what the business structure of the business that you plan to buy currently is. You need to determine whether it will match with how you plan to run your business.
You also need to determine what expectations you will be required to manage. Do you know what standards you will be required to live up to once you take over? Do you know how to keep the suppliers happy and manage staff?
2. Verify the State of the Business
Once you have understood the important factors you should consider and have identified a suitable business, you will have to first verify the state of the business before you make an offer. Verifying the state of the business involves a lot of research. It is possible that things are not as great as they appear. That’s why you need to ask questions such as:
What is the Financial Situation of the Business?
The only way you can tell whether or not it is worth it to buy the business is by reviewing critical financial information, such as financial statements that go back at least 3 years. The financial statements you should review include tax returns, profit and loss statements, balance sheets, among others.
Will You Be Required to Pay Extra Fees?
It is important to know the current fees, advertising fees, how much new equipment will cost if needed, how much it costs to train the staff, ongoing fees, as well as whether or not you will be required to pay any transfer fees associated with the purchase of the business.
Why Is the Current Owner Selling?
If the current owners know something about the business that you don’t, they could be looking to sell fast and under the pressure of time to take the offer that’s currently on the table. Always keep in mind that sellers will gloss over the weaker aspects of the business so that the business looks amazing to potential buyers.
Have You Done Your Due Diligence?
You also need to research the industry you are looking to get into as well as any competitors within a 10km radius. Take note of the risks associated with buying this type of business and get in touch with as many previous customers or suppliers as possible to get the vibe of what you are getting yourself into.
Doing your due diligence might sound like a laborious and time-consuming task, but you will be better off in the end. It is definitely better than diving in on impulse only to realise too late that your newly purchased business has a reputation for bad customer service.
3. Making the Initial Offer
You need to work out how to value the business before making an initial offer. Once you have done your due diligence and valued the business, you need to start the negotiations. Negotiating involves making your offer, that’s usually followed by the counter offer by the seller, and bargaining before you reach an agreement. Always seek professional advice, particularly if there are any tax implications.
Use your own sales and profit projections as opposed to relying on figures provided by the current owner. If you have ideas on how to grow profits, this will be your good fortune. Avoid inflating the offer price due to the opportunities you may have identified. If you are unable to identify areas where you can save or areas where you can grow profits, you should rethink your idea of buying the business.
4. Consider the Risk
It is also important to consider your level of risk. The risk will generally be higher if the business you want to buy:
- Relies on very few (1 or 2) major customers or key employees or suppliers
- Has assets (equipment and stock) worth less than the offer price
- Is not currently profitable or has a history of losses
It might sound obvious, but making a lower offer at first and increasing it as needed is always a better strategy than making a high offer at the start. The business will ultimately be only worth what somebody will be willing to pay for it. The seller may need to lower their expectations.
5. Negotiate Goodwill
Goodwill refers to the amount the current owner of the business might expect from you for the value of the intangible aspects of the business such as good location, high profit, loyal customers, established brand, supportive suppliers, or long lease.
You can seek advice from your accountant regarding the most suitable way to deal with goodwill. If possible, you can try negotiating it down. For instance, it could be more favorable to pay more for the assets as opposed to the goodwill since assets can be depreciated over time.
Buyers and sellers usually enter into negotiations from what’s sometimes referred to as a ‘positional bargaining’ standpoint. Both parties are obviously looking to achieve the best possible outcome for themselves, which mean that your interests will be different from those of the seller.
- Your interests will probably include looking to pay as little as possible for the business with the inclusion of as many assets as possible, favorable terms of payment, and warranty protection against the seller’s false claims.
- The seller’s interests, on the other hand, will include looking to make as much money as possible on the sale of the business, handling the sale transaction in the most tax advantageous for them, avoiding contract conditions they are unable to meet, and severing liability ties.
A good bargainer should be able to convince the other party that the other party is actually getting much more than they are paying for. Simply put, that they are paying less than the actual worth of the business.
7. Drafting a Purchase Agreement and Finalising the Sale
Once you and the seller have settled on a price for the business and what that price covers, you will need to draft a contract to give the agreement legal credence. A contract in writing ensures that both parties have a clear understanding of what each party has agreed to provide, for what cost, and for what payment method.
Sellers usually prefer lump sum payments for the business, and if that’s the case, you will need to secure funding for the purchase. However, sellers often have to leave some funds in the business to help finance the transaction. You can try asking the seller whether you can pay off the business over a period of time as opposed to a lump sum payment.
Buying an existing business in Australia can be far easier than setting up and launching a new business from scratch. However, you will need to do proper research and due diligence before you go ahead, especially if this is your first time doing this. All you have to do is ensure that you follow the 7 checklist items discussed here.