Are you tired of the routine life of an employee and thinking about running your own business, being your own boss, and taking on more challenges and rewards? If you are considering going into business, you first need to decide whether to start a new venture or buy an existing one. If you are considering buying an existing business, once you have identified your target, it is essential to carry out due diligence before making a purchase offer. This will help you make informed commercial decisions, avoid significant losses, and operate the business more effectively!

Below, we share the questions you need to consider before buying a business, and how to conduct due diligence. We hope this helps you buy the right business and avoid unnecessary detours!

1. Consider how the business is being valued

You can ask the seller or the business representative how they arrived at their asking price. Although there is no set formula — since a business is ultimately worth what a third party is willing to pay — most businesses sell for 2 to 4 times their earnings (after wages).

2. Consider what you are actually buying

A business sale will take the form of either an asset sale or a share sale. An asset sale usually reduces the risk to the buyer.

3. Pay attention to the business’s financial records (Business’Financial Records)

If you want to buy a business, we recommend that you ask the seller to provide the following financial records for your review:

• The business’s accounts for the most recent two financial years
  (Profit and Loss and Balance Sheets);
• Current year financial position;
• Business Activity Statements (BAS) for the past four quarters;
• The most recent income tax return; and
• A list of every asset to be included in the sale of the business.

Note: During the sale process, you should physically inspect the assets and record their valuations.

4. Consider whether the financial records are accurate

You need to break down the financial records to verify their accuracy. For example, compare coffee sales against the kilograms of coffee purchased by the business. You can also review website traffic to see whether the figures align with those provided.

5. Will you retain existing employees

Generally, if you are only purchasing the assets of a business, employee entitlements will not transfer to you as the new owner. Instead, the current owner of the business will terminate the employment relationships on the final day. The new owner may then offer the employees new contracts.

6. What is the Trial Period

The most important step in verifying revenue is agreeing on a minimum trial period. During the trial period, your minimum sales should be no lower than the average turnover shown in the most recent financial records. The trial period should be no less than 7 days, to avoid any single day of the week skewing turnover.

7. Consider other stakeholders

One of your best sources of information can be the employees, suppliers, and customers. Take every possible opportunity to speak with them and ask questions about the business you are looking to buy.

8. Have you engaged a Business Broker

Business brokers take a commission from the sale of a business, so you should be cautious and selective.

9. Have you prepared a business plan and financial forecast

Take the time to develop a solid business plan and financial forecast, and understand the drivers of the business. When you buy and operate your new business, this business plan can serve as an important reference.

10. Has a lawyer reviewed the business sale agreement

You must ensure that your lawyer has carefully reviewed the following:

– the business sale agreement;

– the assignment of the lease or the entering into of a new lease; and

– legal due diligence.

11. Does the business require any permits or licences

Obtain copies of all relevant permits and licences (for example, a liquor licence or a local food permit). You can contact the regulator directly to confirm that the licence is valid and transferable on sale.

12. What is the Handover Period

– Every seller of a business has built up a network of relationships with customers. However, if the seller suddenly leaves, this previously maintained network may disappear.

– To minimise this impact, it is best to include a handover and training period in the contract. This gives you the opportunity to be introduced to existing customers, and allows the seller to answer any questions you may have about the business along the way.

– When is the handover period: the handover period begins once the seller has sold the business to the buyer. It is the seller’s opportunity to introduce the buyer to their customers and other business processes.

As is well known, acquiring a business is a challenging venture. Therefore, before buying a business, thoroughly considering the issues above and carrying out due diligence is critical. You need to gather and understand all aspects of the business you are looking to buy, including the seller’s reasons for selling, the business’s current customer base, its contracts with suppliers, the ownership of key assets, and whether the business has any liabilities, and so on.

As you can see, there is a great deal to review, and in considerable detail. If you are planning to buy a business, we recommend seeking the assistance of a qualified lawyer, so that every step is covered and the final handover of the business runs smoothly!