Buying a Business? This is What You Should Know

What to know When Buying a Business

Buying a business is a significant investment, both financially and personally. It is essential to conduct thorough research and due diligence to ensure that the investment is sound and meets your needs and expectations.

Cristian Marcu, Principal of ELDAD Property Group interviewed Adam Mantell from Rudd Mantell Accountants to talk about what you should be looking at when buying a business and together they came up with these 12 points.

1.     Understand what you are buying - When buying a business, it is vital to understand what you are buying. It is not just the name or brand of the business that is being sold, but everything that comes with it. This includes tangible assets such as property, inventory, and equipment, as well as intangible assets such as customer lists, intellectual property, and goodwill. It is crucial to assess the value of these assets and determine how they contribute to the overall worth of the business.

2.     Assess the unique selling proposition - The unique selling proposition (USP) of a business is what sets it apart from its competitors. Understanding the USP and how it contributes to the business's success is critical in determining its value. You should assess the market, the target audience, and the competition to determine how the USP sets the business apart and the potential for growth and expansion.

3.     Understand the financials of the business - Before you buy a business, it is essential to review the financial records and assess the financial health of the business. This includes reviewing the income statement, balance sheet, and cash flow statement to determine profitability, liquidity, and solvency. Additionally, it is essential to assess the business's financial projections and understand any potential risks and opportunities.

4.     Perform due diligence - Due diligence is the process of investigating and verifying the information provided by the seller to ensure that the business is a sound investment. It includes reviewing financial records, legal documents, contracts, licenses, and permits. Due diligence also involves assessing the business's management team, operations, and market position. It is essential to conduct due diligence to uncover any potential issues or risks associated with the business.

5.     Understand the contracts and agreements - When buying a business, it is critical to review all contracts and agreements, including those with suppliers, clients, and key staff. Ensure that these contracts allow for the sale to happen, and that the current employees can transition over with the business. Reviewing these contracts will help you understand any ongoing obligations or liabilities that may affect the business' value.

6.     Assess the industry trends and market conditions - It is essential to assess the industry trends and market conditions to determine the potential growth opportunities and risks for the business. This includes reviewing the competitive landscape, analysing consumer behaviour, and understanding regulatory requirements. By understanding the industry and market conditions, you can better assess the business's potential for growth and expansion.

7.     Understand the reason for the sale - Understanding the reason for the sale is critical in determining the value and potential of the business. Is the business being sold due to retirement, health issues, or a desire to pursue other ventures? Understanding the motivation behind the sale can provide insight into the potential for future growth and success.

8.     Have a clear understanding of the purchase agreement - The purchase agreement outlines the terms and conditions of the sale and should be reviewed carefully before signing. Ensure that the agreement includes warranties and indemnities and that you understand the legal and financial implications of the sale.

9.     Engage the services of a professional advisor - Buying a business is a complex process that requires expertise in multiple areas. Engage the services of a professional advisor, such as a lawyer, accountant, or business broker, to assist with the purchase process. A professional advisor can provide guidance and support in conducting due diligence, negotiating the purchase price, and reviewing contracts and agreements.

10.  Economic environment - the economic environment can greatly impact the success of a business. As we saw during the COVID-19 pandemic, businesses in certain industries were hit hard, while others were able to thrive. It is important to assess the potential impact of economic conditions on the business and to plan accordingly. For example, a business that relies heavily on tourism may struggle during an economic downturn, whereas a business that provides essential services may be more recession-proof.

11.  Understand the potential for growth and expansion - you should assess the business's current market position and consider opportunities for expansion into new markets or the introduction of new products or services. It is also important to assess the potential for cost savings or increased efficiencies through the implementation of new technologies or processes.

12.  Have a transition plan – it is so important to have a plan in place for the transition of ownership. This includes communicating with employees, suppliers, and clients, and ensuring that the business continues to operate smoothly during the transition period. It may also be necessary to obtain financing to support the purchase, and you should have a plan in place for repaying any debt incurred.

Buying a business in Australia is a significant investment that requires careful consideration and due diligence. By understanding what you are buying, assessing the unique selling proposition, understanding the financials, performing due diligence, reviewing contracts and agreements, assessing industry trends, understanding the reason for the sale, having a clear understanding of the purchase agreement, and engaging the services of a professional advisor, you can make an informed decision and ensure that your investment is a sound one.

If you are considering buying a business, contact Cristian from ELDAD Property Group for a confidential discussion and tips on How to Buy a Business. You may also like our Video Series on Buying and Selling Businesses.