Before buying a business, what should you know?
You can skip the start-up phase by buying an existing business and get started right away as your own boss.
Check the financial health of any business you're interested in thoroughly once you've found it. You can get a better understanding of your potential business' prospects by completing this checklist.
1. Financial statements
- Review the past three years' balance sheets, profit and loss statements, annual reports, and cash flow statements. You can discuss this with your accountant.
- The numbers should be verified against independent evidence, such as sales records, invoices, bank statements, and loans if the statements have not been audited.
2. Tax records
- Check the last three years' income tax returns
- Reconcile BAS with the financial statements of the business to determine taxable income and profits
- (If applicable) Check payroll tax records. Pay-as-you-go income tax, GST, and other tax obligations, such as payroll tax, should all be current.
- Verify 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?
To guarantee that the assets listed in the books are accurate and that value isn't overstated, it's important to ensure that the assets listed in the books match those in the business.
- Check off physical items on an asset list
- Assess the value of the inventory you have on hand by performing a stocktake
- Check the condition of all plant, equipment, fixtures, and fittings
- Ensure assets are insured until settlement
- Get copies of leases if assets are leased
- In the event that inventory has been sitting in the business for a long time, ask why. The company may be unable to shift if the customers don't want it.
- Ask the owner or someone else who knows how the asset works if you don't understand it.
4. Customers and suppliers
- Find out who your key customers are
- Verify sales contracts to see what future business is guaranteed
- Make sure no major contracts are about to expire
- Investigate suppliers and their terms of trade
- Ask customers and suppliers for feedback on the business if possible
5. Reason behind sale
In order to make sure the business isn't being mismanaged or if it isn't making enough money, you need to know whether the owner is offloading it. Getting information about the business and its problems from customers, suppliers, and competitors is a good idea
Examine the reasons for the sale and try to understand the current owner's motives by asking:
- What is the owner's experience with the business?
- When did it go on the market?
- How many offers have been made so far?
- What are the owner's plans for the future?
6. Legal rights and obligations
Ensure that the business has the relevant permits and licenses required by government regulations
- Ensure that all worker entitlements, such as leave entitlements and compulsory superannuation, have been met
- Ensure that workers' compensation premiums are up to date
- Ensure that intellectual property rights are protected through licences, patents, trademarks, and registrations, and that these rights will be passed on to the new owner
- You should ask for copies of any leases and agreements that bind the business. Can you exercise the right to renew the lease? Is there a right to renew the lease? Could you find another suitable location if there is no right to renew?
- 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
- Keep copies of all correspondence and statements from the vendor.
The Australian Bureau of Statistics, industry associations, government departments, as well as business brokers and consultants can provide some of this information.
- Conduct an investigation of your prospective competitors. Take a look at their growth, their strengths, and their weaknesses, as well as the threat that they pose to you. Comparing their profitability, earnings, prices, and costs is best if you can get the data.
- List any potential threats. You can check with local council to see if new competitors are planning to start up.
- Analyze industry trends. What is the growth rate of the sector? What is the profit margin?
- Take economic factors into account. How will a slowdown in the economy affect your business?
Additional 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.
Thank you for reading!
Should you have any queries in regards to the above please contact our office on (03) 9728 1448
The TAS Team
3/653 Mountain Highway, Bayswater VIC 3153
The information contained in this publication is for general information purposes only, professional advice should be obtained before acting on any information contained herein. The receiver of this document accepts that this publication may only be distributed for the purposes previously stipulated and agreed upon at subscription. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.