Thinking of buying an existing business? Before you sign on the dotted line there are many important questions you should be asking yourself, and others.

Choosing the right business to buy depends on your needs and lifestyle. You should make sure you take time to research and understand the business and industry you’re buying into.

When buying a business you may be purchasing tangible things such as stock and equipment, as well as a shop front or other physical premises. There are also some less tangible things included in the purchase price, such as customers and reputation. Ascertaining the value of the tangible assets is relatively straightforward, but valuing the intangibles can be quite lot more difficult.

There are some distinct advantages of buying a readymade business. Some advantages include by-passing the uncertainty of the initial setup phase of the business, having an existing client base with immediate access to sales and cash flow, as well as proven operational processes and procedures. Think how much time you will be saving by knowing which supplier to call for each product or service, and having an agreed price and trading terms in place.

Buying an existing business may also have the benefit of improving your chances of obtaining debt finance. Lenders will be looking at the business’ track record to decide if lending to you is a wise investment.

​But as always, buyer beware. If you fail to do proper due diligence and thorough research you could end up buying a poor performing business with questionable future prospects. The aim of due diligence is to ensure you are well informed about the true state of the business.

Your due diligence should include, at a minimum, understanding the structure of the business, checking the financial records, reviewing business plans and operational processes. Before committing to buying the business we recommend that you get a professional valuation of the business’s assets and liabilities. This will help you have a better understanding of it’s current value and potential for future growth.

When you’re looking at the financial statements you need to understand what you’re looking at, and what questions to ask the seller. For example, if you’re buying a business that is substantially cash-based, you should get an accountant to verify the figures are telling the full story.

If the business has any liabilities owing, ask for copies of the loan documents and ascertain if they are registered against the business on the Personal Property Securities Register (PPSR).

In addition, you should ask to review any licences or permits, contracts, leases and agreements. If the business has intellectual property, it’s important to know if it has been protected by trademark.

It is equally important to familiarise yourself with the industry and direct competitors so you can have a fair idea of the positioning of the business in the market.

When buying an existing business there are some other obstacles you might face that should factor into your decision. You may have to consider customer loyalty that is specific to the seller, dated equipment that needs updating and high staff turnover. If the business is under-performing, you may need to make significant investment in order to make it profitable.

Some other disadvantages you may also need to keep in mind might be poor public image or reputation from the previous owner, or needing to honour existing contracts that may no longer be commercially competitive.

Your research should bring to light if the business is in a declining industry, or if the barriers to entry in the industry are falling and making it easier for new competitors to enter the market.

There may be some red flags that can make you wary of investing. For example, if the seller has a questionable credit record, is reluctant to introduce you to their suppliers or landlord, doesn’t disclose important information about the business (like financial statements or existing contracts). If this is the case you will need to dive a little deeper during your due diligence, so you can be comfortable that you won’t be facing any surprises down the track.

If there are one or more of the above red flags and they won’t agree to a trial period or want to hurry through a cooling off period, then you may want to reconsider and steer clear of the investment.

Depending on the type of the business, there could be many more factors that you will need to weigh in making your decision before you decide to buy. To avoid making a costly blunder getting professional advice early is the key.

It is important to have a plan for acquiring a business, with a clear roadmap of all the things you will need to do for a smooth transition in ownership. Getting advice before you make any important decisions is essential.

Our expert commercial lawyers can help you with your business acquisition plans. Contact us today to get started on making your plans a reality.