What to know before buying a business

Buying an existing business can be an effective way to skip the start-up stage and hit the ground running as your own boss.

Once you've found a business you're interested in, it's important to check its financial health thoroughly.

Financial statements

• Review balance sheets, profit and loss statements, annual reports and any cash-flow statements for at least the past three years. You can do this with your accountant.
• If the statements aren't audited, you'll need to verify the numbers against independent evidence, such as sales records, invoices, bank statements and loan documents.

Questions to ask:

• Are there new or increased costs you should anticipate?
• Are there any cash flow or debtor problems?

If the current owner isn’t willing to provide these details, it’s important to know why. You may be able to work with a business broker or agent to get the necessary details.

Tax records

• Check income tax returns for the previous three years
• Check business activity statements (BAS) and reconcile the taxable income and profits with the business’ financial statements
• Check payroll tax records (if applicable). The pay-as-you-go (PAYG) income tax, GST and other tax obligations, such as payroll tax, should all be up to date.
• Check stamp duty records (if applicable). Will the purchase of the business be GST-free, and approximately how much stamp duty will you have to pay?

No matter how good you are at numbers, you'll probably want an accountant to go over these details with you, so you can be sure nothing is missing.

Assets

It’s essential to make sure that the assets listed in the books match what exists within the business and that value isn’t being overestimated.

• Ask for an asset list and check off physical items against it
• Do a stocktake to assess the inventory on hand and its value
• Complete a review of intangible assets, such as goodwill, brands or intellectual property
• Inspect and verify that all plant, equipment, fixtures and fittings are in good working order
• Check assets are insured until settlement of purchase
• If assets are leased, get copies of the leases
• If inventory has been sitting in the business for a long time, ask why. It could prove difficult to shift down the line if customers aren’t interested.
• If you don’t understand how an asset works, ask the owner or someone else who may have experience with it.

Customers and suppliers

• Get a list or database of key customers
• Check sales contracts to see what future business is guaranteed
• Check if any major contracts are about to expire
• Get details of suppliers and find out what the conditions of trade may be
• If possible, get feedback from customers and suppliers on the business.

Reasons for the sale

Investigate the reasons for the sale and try to understand what the current owner’s motives may be by asking:

1. How long has the owner operated the business?
2. How long has it been on the market?
3. How many offers have been made?
4. What's the owner planning to do next?

You want to know whether the business is being badly managed or if the owner is offloading it because it isn’t making enough money. It’s a good idea to speak to customers, suppliers and competitors for information about the business and its problems.

Legal rights and obligations

• Review government regulations that apply to the business to ensure it has the relevant permits and licences it needs to operate
• Check if any worker entitlements need to be made, including leave entitlements or compulsory superannuation
• Check whether workers' compensation premiums are up to date
• Check if intellectual property is protected through licences, patents, trademarks and registrations and if these rights will be passed on with the sale. To learn more, visit IP Australia
• Check the lease and any agreements binding the business and ask for copies. Questions to ask about the lease: Is there a right to renew on the lease and can you exercise that option? If there isn’t a right to renew, could you find another suitable location?
• Check the Australian Securities and Investments Commission (ASIC) website for company details
• Contact your state or territory consumer affairs agency for a record of any unscrupulous trading
• Check the Australasian Legal Information Institute website to see if the current business owner has ever been taken to court
• Ensure the vendor puts all agreements in writing and keep your copies of correspondence and statements.  

Competitors

You can get some of this information from industry associations, government departments and the Australian Bureau of Statistics, or seek specialist advice from industry bodies, consultants and business brokers.

• Investigate your prospective competitors. Look at their growth, strengths, weaknesses and threat to you. If you can, get the data to compare their profitability, earnings, prices and costs.
• List any potential threats. You can check with local council to see if new competitors are planning to start up.
• Research industry trends. Is the sector growing or slowing? What are the profit margins?
• Consider economic factors. If the economy slows down, how will this affect your business?