How to buy a business

Doing thorough due diligence is an essential part of buying a business. Picture: Getty
Doing thorough due diligence is an essential part of buying a business. Picture: Getty

Escaping the 9-5 “wage slave” life is a common ambition among entrepreneurially-minded Aussies, but buying an established business is more complicated than it sounds.

While a growing number of websites have made it easier than ever to find a business for sale, selecting the right one depends on carrying out careful research, doing thorough due diligence and seeking good advice.

Every business is different, so there’s not a universal checklist of what to do, but there are some general rules.

Once would-be owners decide on the kind of business they’d like to own, they need to turn their attention to the particulars of each business in which they’re interested. This means drilling into each business’s legal and tax history, assessing its current cashflow, and analysing the business trends affecting the broader industry in which the specific business operates.

Bob Boswell, director of Transact Group, and Gary Zinner from SBX Business Brokers explain how to buy a business.

Small business

Doing thorough due diligence is an essential part of buying a business. Picture: Getty

What type of business should you buy?

Boswell says it’s easy for entrepreneurs to look at their skills and hobbies and buy a business to match, but a passion can turn into a chore under tough circumstances, so this isn’t always the best way to go.

Budget and access to finance also play a huge role.

When choosing a business, Boswell recommends researching the market thoroughly. Would-be owners should also ask themselves the following questions:

  • What industry do I want to work in?
  • Which business model, ie retail, wholesaler, franchisee etc, is most appropriate?
  • Where do I want to locate my business? Is this a commercially viable location?
  • How much time can I commit?
  • How much can I realistically afford to invest? 

“Answering these questions will help flesh out the idea of running a business in your mind, and this can guide you to find a great business opportunity,” he says. 

Zinner says it boils down to the purchasers’ budget, proximity to their home (so they can operate the business) and experience or interest in the type of business being considered.

Find a business for sale

There are numerous online marketplaces for buying and selling businesses and Boswell and Zinner agree they’re the most common place to find a business to buy nowadays.

There are also private broker groups, where brokers match buyers to sellers.

Do in-depth due diligence

Next comes the tough stuff: Due diligence on the business for sale. 

Boswell says buyers need to consider the risk to themselves, their family and existing employees of the business should something go sour after the purchase.

“For this reason, we always recommend undertaking full due diligence with a professional before making any commitments.”

Due diligence should cover the following:

  • legal and tax history
  • financial position and trends within the industry and business itself
  • history of business operations
  • condition and lifespan of business assets
  • expenses, debts and cash flow.

Zinner recommends also looking closely at leases and franchise agreements, if they’re in place.

cafe

Whether you’re interested in buying a hospitality venture or a creative agency, looking online is a good place to start your search. Picture: REA Group / Krzysztof Dydynski

Look out for red flags

Choosing to buy a business is a huge financial commitment, so being able to spot red flags is vital.

Boswell says buyers should be wary of sellers who:

  • neglect to disclose important information, particularly financial details
  • don’t have their financial reporting in order
  • refuse to introduce prospective buyers to their suppliers, landlord or other agents
  • are currently or have recently been involved in legal proceedings
  • have a questionable credit record
  • are pushing to close the sale quickly, without allowing time for due diligence.

Zinner says to look for unreported revenue and expenses, inflated sales figures, unusually short leases and any glaring omissions.

Finally, get good advice

While it’s possible to buy a business without involving professionals like accountants and solicitors, it’s not advisable, according to Boswell.

Without help, he says buyers are far more likely to miss important steps in due diligence or miss hidden warning signs.