Researching a Business Prior to Purchasing

by 12th of October, 2012

Some people prefer to buy an existing business rather than starting from scratch for a number of reasons. An established business already has a client base, market share, employee’s, lease agreements, shop premise, supplier list and so on. It is a lot easier to buy an existing business rather than starting from scratch.

You need to ensure you research a business before buying it!

So what is involved in buying a business and what research should you consider throughout the business buying process?

Initial Decision: What type of business should you buy?

What skill set and experience do you have in a certain business industry? Purchasing a business within an industry you are knowledgeable about will not only be an asset in operating the new business but will help you understand the pricing of the business and what’s involved. Buying a business in a different industry will leave you faced with a lot more learning challenges to face. You may find yourself purchasing a business you know little about.

Let the Hunting Begin: How to find a business for sale?

With the advance of technology, the number one place for finding a business for sale is online, with a number of websites advertising business sales. A number of businesses also become available by word of mouth and are sold with very little advertising done. So make sure you let people in your industry know you are looking to buy a business and you never know what may become available. With this method be sure you check out the credentials and financials of the business and don’t just buy it because you heard about it “through a friend”. You can also register with your local business broker and they can let you know when a business becomes available that matches your criteria.

Finding Out More: Meeting with a Business Owner or Broker.

Once you have found a business you are interested in you next need to meet with the business owner or broker to do a walk though of the business. During this process you can see how the business operates, what type of clientele are attending the business, its location, staff, inclusions in the sale etc.

If you feel comfortable with what you have seen you can then begin the process of due diligence. This is where you will probably sign a confidentiality agreement and be allowed to view the businesses financials and legal documents. Once you have access to the financials (e.g. cash flow, balance sheets, BAS statements, accounts payable and receivables, employee files etc) and other documentation (e.g. lease agreements, contracts, legal obligations, ABN, registrations and licenses, supplier list, manuals etc) you will want these to be reviewed with an accountant, lawyer or business advisor.

Closing the Deal: Purchasing the Business.

Once you have thoroughly investigated the business and decided you wish to go ahead with the purchase the next step is to agree on a price. Is the price set by the owner reasonable? Is the SAV accurate? Be sure to take into account any stock that is slow moving – you don’t want to be over paying for stock they couldn’t sell. Also assess the current value for equipment, not when it was first purchased. Once you have agreed on a price you will want to establish the payment plan. Most businesses are sold with installments and a large deposit payment. Often the income from future sales is used to make further payments. It all depends on coming up with a suitable payment plan for both parties. You will also find that banks will lend to a certain amount and that may have to come into consideration.

Next step, involves getting the lawyers to draw up a contract of sale that outlines the inclusions in the business sale such as stock, training services, equipment, business name, licenses etc as well as the payment plan. Once this is all done and signed, the next step will be to have a date of exchange and the new owners can move it. You also need to ensure all of the ownership changes are lodged with the ATO and other government bodies as well as any other necessary businesses.

Have you bought a business? What sort of research did you conduct before purchasing?