Before you buy a business, it’s important to complete a risk assessment to make sure you’re not about to get into a risky business.
Buying an established business can be an exciting way to make money, be your own boss and enjoy new challenges as a small business owner. It only takes a quick online search to find hundreds of 'business for sale' ads featuring business opportunities around Perth and WA.
From the outside, any one of these might look like just the business you’ve been looking for to begin your journey as small business owner.
Before you buy a business, it’s important to complete a risk assessment and compliance check to make sure you’re not about to get into a risky business. It’s a process called due diligence.
Here are four key questions to guide you through doing your due diligence.
Is this business making money?
It’s a good idea to know why the business is for sale in the first place. The reason could be as simple as the current owner moving, retiring or their circumstances are changing. It could also be that profits have been falling steadily and a large-scale, cut-price competitor is due to open around the corner.
There are many reasons someone put up their business for sale. It’s important to know how profitable the business has been, and how this could impact your own plans for the future.
To get a clear understanding of how profitable a business has been in the past, you could:
- Look closely at the past three or four years’ of financial statements, including tax returns and balance sheets.
- Consider financial projections for growth in that industry for the coming years.
- Consult with an expert for detailed risk analysis and advice.
While it’s certainly possible to turn an unprofitable business into a successful one, it’s important to understand exactly what risks are involved in the business you’re thinking about buying.
Before you commit to buying a business, you also need to know whether the current owner’s business debt could become your business debt.
Check that any debt payments and tax obligations are up to date. These could include business loans, income tax, Pay As You Go (PAYG) withholding, stamp duty, GST, capital gains tax and other payments.
What assets are included with this business?
You need to know exactly whether the premises, stock, machinery, equipment and other assets such as websites and marketing materials are included in the purchase. Some of these might be owned outright by the business while others might be leased or on loan. For anything that is leased, you’ll need to look at the terms of the lease agreement carefully.
It’s also a good idea to use the Personal Property Securities Register (PPSR). This gives you a single point to check on debts or issues that might relate to items owned by the business for sale, such as cars, stock and equipment, patents, copyright, financial property and other items.
If the business for sale is a franchise, you’ll need to review the franchise agreement and consider having a legal professional review this too. You’ll also need approval from the franchisor before you can buy the business as a franchise.
Will the lease be assigned or renegotiated as part of the sale?
Location plays a big part in the success of a business. Without a secure lease, you could be at risk of losing the premises, which could have a devastating financial impact.
Relocating a business can be costly. It may also result in losing advantages such as foot traffic, accessibility, and customer familiarity – which can contribute to the success of the business.
As part of your due diligence process, request a copy of the lease and review its terms and conditions. Key areas in the leasing agreement to focus on include:
- How much time is remaining on the lease.
- If extension options are available for the lease.
- If the landlord will assign the current lease to you or if you will need to negotiate a new lease.
If you decide to proceed with buying the business, ensure your contract for sale is conditional on the lease being assigned to you or a new lease being issue. This will protect you if you can’t secure an appropriate leasing arrangement.
What about the employees who work for the business?
Whether you’re planning to keep or replace the current staff, you need to understand what is involved in terms of business management. It’s a good idea to:
- Consider a list of the employees with their wages or salaries and other benefits.
- Understand any workplace agreements, bonus structures, incentives, policies and procedures which relate to managing the team.
- Check that salaries, superannuation, annual leave and other entitlements are all paid and up to date.
More information
Due diligence is an involved process, but it’s a vital step in becoming a business owner.
If you would like advice about buying a business:
- Contact our free business advisory service.
- Read our guide to buying a business for more information.
