Buying a business: Seven best practices

Acquiring an existing business can save time and money by bypassing the establishment process, but there are also plenty of risks and liabilities associated.

We’ve compiled a list of seven best practices for buying a business to help you make the best decision.

Understand the responsibilities

Purchasing a business can yield many benefits, however it is not without a degree of risk. While acquiring an established business will spare you establishing challenges and present an existing client base, it also presents potential liabilities, debtors and contractual complexities.

This is especially true for first time business owners, who must be acutely aware of the responsibilities of operating a business. In addition to the unique obligations of purchasing an established business, first time buyers must also consider the impact that the purchase will have on their lives. Before committing to the purchase, first time owners should ask themselves questions such as:

• Am I financially, physically and emotionally suited to running a business?
• Do I have the necessary skill set and commitment?
• Am I willing to work irregular hours?
• Am I willing to forego a regular income?
• Will this business provide me with the income, working hours and career progression that I desire?

Choose your industry

Your professional skill sets should heavily inform your chosen industry when purchasing a business. While not essential, particularly in the case of experienced business owners, it is advisable to purchase a business in a familiar industry.

If you intend to get hands-on and physically work at your business, it’s best to choose an industry in which you have skills and experience so that you can contribute value to the business.

Understand your budget

Purchasing a business can be an expensive process, and it’s imperative to calculate carefully. While many owners are willing to take on loans for business acquisitions, and it may even be necessary to do so, accumulating debt must be done with caution.

Success is never guaranteed, and there are many internal and external factors that can quickly sink a business. Taking on large sums of debt warrants large regular repayments, which can easily impact cash flow and put the owners personal assets at risk.

If you’re considering purchasing a business, discuss your finances with an accountant and ensure that your chosen business fits within your budget.

Due Diligence

Due diligence is the most important step of business acquisition. Before committing to a business, you must gather as much information as possible to determine the viability and understand your options.

Things to be reviewed under due diligence include:

• Financial statements, tax returns and profit margins
• Business assets
• Contracts
• Intellectual property, patents, copyrights and trademarks
• Inventory, stock and equipment
• Business reviews and online presence
• Customer information
• Leases
• Employees

Business Valuation

It’s important to understand how much your prospective business is worth before you buy. An independent valuation conducted by an accountant will help determine the return on investment, asset value and market value of a business, and ensure that a fair price is paid.

Once a valuation has been conducted, it is important to consider if the price of the business is worth paying. Examine the profit margins of the business, identify trends and goodwill, and determine whether you are willing to risk investment in the business.

Negotiations

By this point of the purchase, you will have an idea of the value of the business and will have determined your willingness to invest in it. With this in mind, it is time to advance discussions with the current owners an negotiate a mutually beneficial deal.

It’s important to understand the owners expectations of the sale, and to keep them tempered with the information gained during due diligence and business valuation.

In most scenarios, acquisitions will take the form of a total purchase of all assets and liabilities. However, there may be scenarios where owners insist on other acquisition types such as mergers and stock purchases. Ensure that you understand the type of purchase and the risks associated before committing

Consult Professionals

Buying a business is a complex process, even for experienced business owners. Experienced professional consultants such accountants and lawyers play a vital role in this process, and will ensure that you get the most out of your business purchase.

If you’re interested in buying a new business Optima, Partners’ team of experienced business advisory accountants can help. Whether you’re an experienced owner or looking to break into the market for the first time, We’ll help put you on the right path.

If you need legal advice on buying a business, CCIWA’s law firm Business Law WA can provide bespoke, specialised support. Contact the firm’s Commercial Law team at BusinessLawWA@cciwa.com or call 08 9365 7746 for further information.