What you should know first before buying a business

Whether you’re an entrepreneur or experienced business leader, or aspire to be either, buying a business holds the promise of success, financial prosperity. And further to this, it is a challenge that you’ll be proud of taking on irrespective of the outcome.

Our buying a business guide provides valuable insights and practical tips to navigate the business buying journey with confidence.

The complete guide to buying a business

Buying a business can be complex but should always be approached with care, consideration and thorough planning. Here’s a comprehensive checklist to aid your process:

Conduct thorough research and due diligence

This is paramount. Assess relevant market and industry trends to determine the growth potential. Examine the competition, customer base, and external factors that affect business performance (or could influence the business).

Identify external factors that may affect business performance, research mitigants, then weight the likelihood of risk, the extent to which risks can be mitigated, and the residual risk to the business. There are risks and exposure to external variables for all businesses; the key here is not to discount a business on the basis it may be influenced by external variables. Rather, the purpose of this exercise is to minimise unintended consequences of buying a business and ensuring the risk-adjusted return of buying a business makes sense prior to pulling the trigger. It’s worth remembering that perfection is a theoretical concept and indecision or inaction can be costly too.

Conducting due diligence (DD) is crucial to uncover any potential risks or hidden liabilities associated with the business. Evaluate the company’s financial statements, legal contracts, tax records and any unresolved legal matters. There are experts who specialise in diligence services for prospective acquirers, such as Chartered Accountants or practising Lawyers. One of many perks of engaging an accredited diligence expert is they should have professional indemnity insurance to cover loss you incur from issues that should have been identified in DD. Just check they have sufficient insurance coverage before engaging an expert for DD services.

Understand your budget; know your financing options

Having a comprehensively considered budget is essential. Assess your financial capacity and evaluate your risk appetite and investment diversification strategy. Financing options such as bank loans, lines of credit from non-bank lenders, private debt or equity funding, Vendor finance, and personal savings are some options.

Consider seeking expert financing and deal structuring advice as there are many targets to optimise for, including but not limited to business cash flow, interest costs, return on capital employed, tax (timing, and amount, of tax payable)

Evaluate the financial health of the business

Gaining a sound understanding of the financial health of the business, and all the levers available to its owner(s), is crucial to optimise for success in acquiring and running a business regardless of your definition of success. Scrutinise the company’s revenue streams, profit margins and expenses. Request detailed financial statements and tax returns to gain insights into the business’ historical performance.

Analyse the business’ key performance indicators (KPIs), such as customer acquisition cost, customer retention rate and average transaction value. These metrics will help you gauge the business’ overall financial stability and growth potential.

Negotiate with the seller

Negotiating with the seller is a critical phase of the buying process. Begin by determining the business’ fair market value based on its financial performance and industry standards. Assess the seller’s motivation and identify potential areas for negotiation, such as price, payment terms or contingencies. Understanding the primary objective(s) of all parties in a transaction (you as the Buyer, the Vendor, the Vendor’s Sale Adviser, and any other stakeholders involved) guides you towards what the deal terms need to address (or solve for).

A Vendor who’s primarily concerned with payment terms – ie want cash upfront – may indicate they’re willing to accept a lower dollar amount in exchange for payment in full at settlement. Understanding their drivers for a zero-balance at settlement will give you insight and set you on the inside path to agreeing terms.

The role of the Vendor’s Sale Adviser here is vital. A good Sale Adviser will have their Vendor’s priorities at the forefront of everything they say and do, more so than their own interests. Inexperienced Sale Advisers may lack the conviction to educate or push back on their Vendors for unreasonable demands. An Adviser acting in self-interest could be pushy for Buyer and Seller to sign and settle, noting they are likely paid most of their fee at settlement.

The most productive Buyers are those who are honest with their motivations and fears, and act rationally (as opposed to emotively).

Finalise the purchase

Once the negotiation process reaches a mutually agreeable outcome, it’s time to finalise the purchase. Secure financing from your chosen source(s) and ensure all necessary legal and financial documents are in order. Engage a qualified lawyer to review the Sale-Purchase Agreement (SPA).

Three tips for Buyers

Resolve supports buyers and sellers by providing a convenient and accessible business marketplace. We also pass on practical information to guide you through the process. As part of our guide to buying a business, we’ve included three tips to ensure a successful transaction.

Become an industry expert

Familiarise yourself with the specific industry in which the business operates. Gain knowledge about market trends, customer behaviour and potential challenges. Knowing this information will help you assess the business’ competitive position and identify opportunities for growth.

Determine the seller’s motivation

Understanding the seller’s reasons for selling can give you leverage during negotiations. If the seller is motivated to sell quickly, there may be room for a more favourable arrangement.

Trust your brain, not your gut

If a DD process that’s thorough and performed by an experienced professional(s) fails to identify any unmitigated risks or other issues for concern, yet you’re still feeling uncertain or fearful, take comfort that you’ve done all you can in the DD process. Whatever decision you make will prove to be a learning – whether that’s reinforcement of a yes or no decision, or regretting the decision you made. Just be aware that fear is an emotion and not necessarily tied to rational assessment of a situation. There is no shame in acquiring a business – on financial terms you’re happy with – in the face of fear after comprehensive diligence. Logic is the reasoning borne from analytical assessment of all available information sources. Trust the process!

Resolve — the #1 place to buy an Australian business

Browse Resolve for a comprehensive selection of businesses available to buy. Browse listings, enquire, review the statement of information, and register interest if you’re serious about more information and have the means to purchase the business you’re interested in. And don’t hesitate to reach out to our team today to introduce yourself and your acquisition preferences or ask about the platform and opportunities in the pipeline.

Feature photo by Scott Graham on Unsplash