Buying an existing business can be a great opportunity – you can hit the ground running without the disadvantages of starting from scratch.
An existing business provides you an already-loyal customer base, regular cashflow and (hopefully) a well-known business name.
But you need to carefully analyse the advantages and disadvantages – including the history of the business – as they are likely to impact its future.
Following is MWM Advisory’s checklist of things to look for when purchasing a business – and a few traps to watch out for.
Ask why
Determine why the business is being sold. Many sellers will often cite health, retirement or other opportunities, but it’s important to dig deep and find out the real reasons in case there are any skeletons in the closet.
If you uncover the seller’s motivations, you will gain a distinct advantage in the negotiation process.
Get a full rundown on the inventory and assets
If applicable to the business, a full list of current stock is a must. There is no point buying a business with thousands of dollars of obsolete stock sitting on the shelf.
You also need a clear picture of the business’s assets such as motor vehicles, machinery and office equipment. You should be able to obtain a depreciation schedule from the seller’s accountant.
Understand your role in the business – no business runs itself
Typically, business owners will downplay their involvement in the business and not pay themselves a wage that truly reflects the operational input they provide.
You could be misled by the appearance of inflated profits.
It’s important to view the business and your role in the business separately; the income generated from the business and your wage should be separate.
Be clear on owed employee entitlements (such as annual leave due)
Long-serving employees can be a wonderful bonus when buying a business. Not only will they be loyal but will also know the ropes and help in minimising the disruption of change.
But, make sure you take into account entitlements the employees are owed.
Ensure you perform an analysis of Long Service Leave (LSL), as this is not often present in the seller’s financial statements.
Any significant entitlements can be used as leverage in negotiating the price of the business.
Get some help
If you are looking at buying a business, engage with your MWM Advisory accountant as soon as possible.
We are here to guide and advise you through each step of the process: from a pre-sale analysis of the business’s fundamentals through to establishing a fair price and then transitioning into the operational phase where we help you maximise cashflow and profit.
