Starting a business from scratch can be exciting but it’s not for the fainthearted. When you start a new business, you’re starting with no customers, no brand recognition, and no cash flow.

For many people, buying an existing business might be a better option. If you’ve done your homework well, buying an existing small business could eliminate a lot of risk, time and stress. Some of the main reasons people choose to buy a business, rather than starting one, are:

You can buy into pre-existing success
It can be easier to obtain finance
It will be the faster and more efficient way to enter the market
There will be pre-existing processes, systems and trained staff
You will have instant revenue

People buy franchises for similar reasons – they usually come with supplier agreements and a proven system of what works and what doesn’t.

Due diligence

If you are thinking of buying a business there are many things you need to check before you make a commitment to proceed. This process is generally called ‘due diligence’, and it simply means doing all of the necessary investigation to make sure your purchase will be a sound financial and lifestyle decision. Your solicitor and accountant can help you with this process.

Due diligence checklist for buying a business

Once you’ve found a business that meets your basic requirements, you’ll need to thoroughly investigate the current and future health of the business before making an offer. The following factors are a helpful start for your due diligence:

1. Why is the business being sold?

Is the business badly managed?
Is the owner selling because future prospects are poor?
Is the owner retiring?
How long has it been on the market? How many offers have been made?

2. What is the competitive landscape like?

Consider your competitors, their strengths and weaknesses and how that might affect you.
Research the industry that the business operates in and assess whether it is growing or slowing. What are the average profit margins for a business in the industry?
How will the business be affected if the economy slows down?
Are prices rising or falling?
Are there any new competitors entering the market?

3. Analyse the financial results and trends:

Check balance sheets, profit and loss statements annual reports and any cash flow statements for at least the past three years
Verify the numbers against sales records, invoices, bank statements and loan documents
Can the business generate enough money to provide you with a reasonable income and make a profit?
Are there new or increased costs you should anticipate?
Are there any cash flow or debtor problems?
Are the bills being paid on time?
What are the stock levels like? What are the stock level trends?

4. Check for any legal issues:

Check for past or current lawsuits.
Confirm legal ownership of key assets including property, equipment, intellectual property, vehicles.
Are there any contractual obligations with staff, customers or suppliers?
Are there any government regulations that you need to comply with? For example – fire regulations, waste, fitout. Have all the relevant permits and licenses been obtained?
What are the terms of the lease for the premises? Is there a right to renew?
Are there debts owing on assets that are registered on the Personal Property Securities Register?
What is the business structure and will you need to change the business structure to suit your personal needs?

5. What is the customer base like?

Are there any customers who are key to the success of the business?
Are there any major contracts that the business is dependent on?
Will the existing customers be happy to continue doing business with you as the new owner?

6. What are the business’s assets?

Ensure there is a list of all of the assets you would expect to receive that are necessary for the business. Are these assets are in good working order?
How much stock is on hand and is it in good condition?
Are any assets leased or on hire purchase and would you want to take over the agreements?
Digital assets: Is there a website, domain name and email addresses that you would expect to take over? What about the social media accounts?
Is there any intellectual property used in the business? Will you need the rights to licenses, patents or trademarks?

7. Check the tax records:

Check income tax returns for the previous three years to verify the business’s profitability.
Compare income tax returns to the financial statements to make sure they reconcile.
Make sure that PAYG (pay-as-you-go income tax), GST, superannuation guarantee levy and payroll tax (if applicable) are up to date.

8. What is the level of risk? Risk may be higher if:

The business relies on a few major customers, suppliers or key staff.
The business has a history of losses.

Negotiating goodwill

Most businesses are worth more than their assets. There can be a significant, intangible value associated with a business’s reputation, loyal customers, quality staff or good location. Goodwill is the amount a seller might expect from a buyer for the value of these intangible assets.

Goodwill is generally valued by looking at the profit of the business, comparing it to similar businesses, and then figuring out how much better this business does than its competitors. In other words, goodwill is a measure of how much a business stands out in it’s field in comparison to it’s competitors. Goodwill can be tricky to put a value on and you’ll need advice from your accountant to negotiate this aspect of the seller’s asking price.

Further resources:

ASIC company and business names search

Considerations when valuing a business

Search the Personal Property and Securities Register (PPSR)

Find industry and economic statistics from the Australian Bureau of Statistics

If you’d like to buying an established business with one our business advisors, please contact us on 07 3023 4800 or at mail@marshpartners.com.au

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