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We have created the above 21 page free checklist to assist in the initial review of assessing a business.
Top 13 points to consider when Purchasing a Business
- Be really clear on what it is you are buying. Is it the freehold or the goodwill, stock, plant & equipment? Are you buying the vendors business entity or starting your own? What do you actually get that will give you comfort that the business will perform the same into the future? Are there customer or supplier contract in place?
- Do you have the right personal characteristics to operate a business? Do you have a good understanding of what is involved? Make sure you seek advice from people you know in business, so you have a good idea of the personal requirements required.
- Why is the vendor selling? Is their motivation genuine? how important are they to the business? Are key customer, supplier and staff relationships transferrable to you from the vendor?
- Dive deeply into the numbers. Immerse yourself in understanding the profit drivers of the business. Break down the numbers and build them back up – meaning, understand a sale at a micro level, and multiply how many days, weeks and a year to build back to the financials and see if this is reasonable. You need to be comfortable in what you are buying can perform as claimed
- People. Your people are key! Who is coming with you? How much and what do members of the team know? Will they stay or go? who is critical to the business? Understand your people, their skills, knowledge, relationships with customers and suppliers, employment terms, etc.
- Check compliance, on everything, usually with a lawyer, but you can get started on your own. Basic things like is there a license or approval required to operate the business? Check with council and any other industry body, etc. Further, your suppliers, they may not open up an account with a new entity, it may be non transferrable, so check the compliance of the business and its legality to operate. Are you licensed to do, what you are doing, in the area you are doing it?
- If you are not buying the freehold, check the lease. Check for tenure and any other issues (with a lawyer). It may be that the rent is much higher or unfavorable terms are about to kick in. Some businesses are completely reliant on their location and if the lease is short, this may devalue the business. In most cases, you want a lease as long as possible.
- Check through systems / processes, data bases, IT and their integration. How well systemised and looked after is the business. May not be a deal breaker, but at least you’ll know what you are getting into.
- Do your homework on competition. Size, products, location, competitive advantage, price, service, ease of entry, etc. Do a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis.
- What is the blue sky in the business. Most buying a business are doing so to grow the business and make it more valuable. Identify and understand what this looks like for you. What is the opportunity?
- Make sure you are organised: business structure and business registrations (ABN, GST, payroll, TFN, etc), bookkeeping software, professional advisors, finance, insurance, working capital, employees.
- Are there any issues or trends with the industry? Understand where the industry is at, its challenges, potential for growth, or issues. You don’t want to be buying a blockbuster just before the launch of Netflix!
- If you are buying stock, make sure you understand what it is you are buying! Is it good stock (as in will it sell)? How much stock do you need and how long can it take to replenish your stock?
We are business accountants who are skilled to assist you when purchasing a business. Please contact us for assistance, we’ll be happy to assist, with a free initial chat.
