What To Look Out For When You’re Buying A Business

Buying a business is a big step for most people. It often leads to significant changes in both your work and personal life. Most people who choose this route do so to step away from the 9 to 5 life and get more control over their work life, earnings, and future.

While you always have the option to start your own business, there are many benefits that come with buying an existing one. It will already have customers, branding, and more, so you don’t have to spend time and money building the business from scratch. However, buying an existing business also comes with challenges. 

Existing businesses may have debts, legal obligations, and other things worth noting that you won’t know about from a look at their business listing. As such, there are a few things that we recommend you look out for when buying an existing business.

This article will look at the considerations and due diligence you must perform before buying an existing business based on our experience helping thousands of people buy businesses each year. Learn more by reading on!

Perform the Requisite Due Diligence

When buying an existing business, it’s important to ensure you’ve done as much due diligence and research as possible before signing on the dotted line. Performing this due diligence will help you discover any hidden anomalies, issues, or red flags related to the business that may only otherwise arise after you officially own it.

These checks should span everything from financial due diligence, like looking at financial statements and revenue trends, to legal due diligence concerned with current contracts, leases, and any legal disputes. You want to get as much information as possible so that you can feel confident becoming an owner of this business.

Due diligence may seem overwhelming to someone who has never bought a business before, so we recommend working with experienced professionals where possible, including solicitors, accountants, and business brokers, to ensure everything is in shape. Here at Eden Exchange, we can extend this kind of support to each one of our clients when they buy a business with us.

Look Into the Finances

Though looking into the finances of a business may come under financial due diligence, we have included it separately here to give a more in-depth analysis of what it is you should be looking for. 

These are the aspects of a business’s finances you should review before buying:

• Financial statements: This will include profit and loss statements, cash flow, and balance sheets.
• Revenue sources: As a new business owner, you need to know where your money is coming from. Get a better understanding of the stability of the business by understanding each revenue stream.
• Profitability: Calculate key ratios, including net profit margin, gross profit margin, and operating profit margin. These will help you compare the performance of the business to others within their industry.
• Debts and liabilities: When you buy a business, you may inherit debts, loans, and liabilities. It is best to understand these thoroughly to ensure that buying the business still makes financial sense.
• Assets and inventory: Examining the tangible and intangible assets of an existing business will give you a better sense of what you’re actually buying.
• Operating expenses: These will include salaries, utilities, and overhead costs. You may take the opportunity to look for savings somewhere.
• Tax compliance: Ensure the business complies with Australian business tax law.
• Legal and regulatory compliance: Assess the compliance of the business — do they have the necessary licences and permits? Any outstanding issues can financially impact you further down the line.
• Projections and forecasts: These look into the future and will help you assess the business's ability for growth.
• Financing options: How will you continue to finance the business? Are there loans, government grants, and schemes you can take advantage of?
• Contingency: These plans must address risks in the face of financial uncertainty. They can help mitigate any financial changes once you become the owner.

Check out Any Legal Liabilities

We have previously mentioned legal liabilities in our finances section, but these liabilities don’t always come in the form of debts or loans. In fact, there are a number of different kinds of legal liabilities you need to look out for when buying an existing business. These include the following.

• Contractual obligations:  You should inspect all contracts between suppliers, customers, employees, and leases to ensure there aren’t any unfavourable terms or restrictions that could affect the business operations.
• Legal claims and litigations: Check for historical disputes, lawsuits, and regulatory investigations. Also, assess whether these issues could continue into your own tenure.
• Intellectual property: Ensure there are no intellectual property disputes and verify the ownership and status of trademarks, patents, copyrights, etc., associated with the business.
• Environmental liabilities: You may find that the business you’re buying is subject to regulations and permits regarding certain aspects of its operation. This may include hazardous waste, contamination, and more. Ensure the business is compliant with all these regulations.
• Data privacy and security: In the digital age, it is absolutely imperative that you protect your company data and comply with all data privacy regulations.
• Insurance coverage: Ensure that the business has adequate coverage for liabilities and risks. Check out whether they need updating and can be transferred under new ownership.

Business Entity Considerations

In Australia, there are a number of different business entity types. It is important that you understand what kind of entity the business you're buying is. Options include companies (Proprietary Limited or Pty Ltd), trusts, Limited Liability Partnerships (LLP), Cooperatives, and more.

Each business entity comes with different tax and liability implications and differences in business operations. You will need to thoroughly understand what kind of business you own to ensure you comply with these regulations.

Understand the Assets Involved

When searching for a business to buy, we recommend finding a listing with high-quality pictures. Not only will this give you a sense of the physical space you are purchasing, but you can also take a closer look at the tangible assets that come with the business.

In addition, any business seller should be able to give you a spec sheet that includes everything from physical property and machinery to intellectual property and social media followings.

Learn More About Day-to-Day Operations

Day-to-day operations ensure the smooth running of the entire business, so it is in your best interests to get to know how things work. Is the business operating well? Is their production line smooth?

You should look into things including the supply chain, manufacturing and operations, and the general well-being of employees. You can find out a lot from the day-to-day running of a business, and you may notice some red flags that didn’t appear on the paperwork you were given.

Consider the Reputation

If the business you are buying doesn’t have a good reputation in the industry or the community, you may be able to negotiate a better price. After all, you take on more risk by owning a company with a poor reputation.

Make sure to do your due diligence and learn more about how the company is seen within its market. If you don’t know the industry well, you may be blindsided when you take over.

The Future

There is no point in buying a business with no future, so make sure you assess the company's potential. You want to know that this business will be an enduring form of income for you in the long term before you take over.

If you are taking the company over with big ideas for the future–perhaps you want to bring it into the 21st century by investing in new technology, or you just think you could do a better job than the current owners–you need to make sure that your ideas are viable, both financially and physically.

Final Thoughts

Buying a business comes with many risks, so doing your due diligence before you take over is imperative to avoid being blindsided by costly errors and liabilities. Ensure you thoroughly evaluate the business and understand any risks you’re taking before you go through with the sale.

If you’re looking for a place that consolidates all the expertise and guidance you need for buying a business, then why not check out Eden Exchange’s DealXchange platform? This business buying and selling platform has transformed how individuals buy and sell businesses and could help you too.

With customisable feeds, lead generation, seamless integrations, and much more, you’re in good hands when you work with Eden Exchange to buy an existing business. Schedule a demo of DealXchange now to learn more about this innovative business buying platform.

Who we are

Eden Exchange is an integrated multi-channel platform, simplifying business buying and selling. We match, refer and connect business buyers, sellers & brokers in an ecosystem that facilitates frictionless franchise, business and finance transactions. Visit www.EdenExchange.com and connect with our engaged and multidimensional transaction network today.