Buying an existing business

BUYING AN EXISTING BUSINESS 

Buying an existing business can be both exciting and overwhelming.  There are many positive and negative aspects to consider.  For example, a solid business history can help ensure a successful operation continues and can also make borrowing of any necessary funds much easier, whereas a poor public image inherited from the previous owner or over estimating the goodwill value of the business can potentially result in significant problems for the business.

One of the main reasons people would buy an established business over starting a new one is for the established infrastructure and ongoing cash flow.  They often come with supplier agreements in place and a proven system and history of what works and what doesn't.  

CONSIDERATIONS

Before you buy an existing business you need to determine the current value of the business and identify its future prospects by considering many things such as:

Current owner's objectives

"If the business is as wonderful as they make out, why are they selling?"   Always keep this question in the back of your mind and seek to uncover the answer.  Working out the seller's motivation will help you determine if the business is for you.  Is the current owner time poor, is it for financial, family or health reasons, is a competitor planning to open nearby?  Doing your homework in this area can really pay off. 

Reputation

What is the owners' relationship with customers, staff and suppliers?  What is public perception of the business?  

Get a feel for the business

Immerse yourself in getting to know the business.  Research its current market, identify its competitors, identify any future risks for the business or the industry, visit the business unannounced or stand out of view and estimate the amount of customer traffic and sales activity.

Employees

Who are the key employees?  What is their skill level?  What is the rate of staff turnover?  How do they feel about a change of ownership?  Would any staff be likely to leave and what would be the impact of that?  What are the associated costs?  Would you retain all staff members?

Customers

What is the size and location of the existing customer base?  Is there potential to grow the current customer base?  What are customer perceptions of the business?  Who is their main contact at the business?  What do they like or not like about the business?  Will they continue to support the business after change of ownership? 

Suppliers 

Who are the current suppliers?  What is the business relationship with suppliers?  What is the credit history?  Does the business pay on time?  How does it compare with competitors? Are there alternative suppliers available? 

Finances 

Does the business have an efficient accounting system in place?   Does the current owner keep track and records of financials?  When was the last full audit?  What is the stock level?  Are there any bad debts and why do they exist?  Do the financial records show that the business is profitable?

Legal Matters

Have you sought the advice of a lawyer?  What are your legal obligations in regards to running the business?  What contracts are in place or need to be put in place?  Have you thoroughly reviewed the purchase contract?  Does the business legally own all key assets?  Are there any past, current or pending lawsuits?  

Business structure

What is the current business structure?  Do you need to change it to suit your business needs?  What are the legal, tax and record keeping requirements of your business structure.  

Costs 

What are all fixed and variable costs of the business?

Premises

What is the condition of the premises?  Is a new fitout required to suit your plans for the business?  If so, what is the cost associated with any improvements?

Assets

What assets does the business have?  Does it have any intellectual property or leasing arrangements?

Inventory 

What inventory is included in the purchase?  Are there systems in place to manage the inventory? (eg. storage, distribution, turnover) 

Tax

What kinds of tax will apply? Consider GST, Capital Gains Tax, and stamp duty implications.

History 

What has and hasn't worked in the business for the previous owner?

Planning 

Have you written your Business plan and Marketing plan to help you document your business objectives and identify how this business will meet your goals?

NEGOTIATING GOODWILL 

Goodwill is an amount the seller might expect from you for the value of the business's intangible assets such as an established brand, loyal customers, high profit, quality staff, good location, long lease or supportive suppliers.  Seek the assistance of an accountant to help you determine the value of the goodwill in the business.   

IS BEING A BUSINESS OWNER THE RIGHT CHOICE FOR YOU?

As you can see there is a lot to consider when buying an existing business but with the right support and help it won't be as daunting as this checklist may seem.  By obtaining as much information as possible in regards to the business you intend to purchase, you will be well placed to be able to determine the worth of the business as well as make prudent business decisions well into the future.  We of course highly recommended that you seek advice from your solicitor, accountant and other business advisors before entering into any contracts for sale or binding agreements.

In addition to carrying out the above due diligence successful business owners more often than not, have some very similar personal attributes that significantly contribute to their success.  Attributes such as passion, persistence, drive, discipline and decisiveness, our checklist will help you uncover whether you currently have what it takes to lead your business to success. 

To help you determine if you have the personal attributes required to be a business owner, download our checklist below.  

Download Checklist - 'Do I have what it takes to run my own business?'

Gordon Garling Moffit Lawyers