How to buy a business: Your step-by-step checklist to owning an existing business

Tired of playing a support role in someone else’s business story?

Ready to become the star of your own epic business adventure?

You don’t even have to start your own business from scratch. Buying an existing business could be a quicker and easier way to take control of your career destiny.

Advantages of buying an existing business

When you buy an established business, it often means:

• the hard slog has been done to get it up and running

• you have existing clients and income from day one

• there’s proof that a market exists for what you’re selling

• you have experienced staff ready to help you succeed

• you get valuable business contacts as well as plant, equipment and stock

• the inevitable new business issues have already been solved

• banks are often more comfortable lending you money.

Disadvantages of buying an existing business

Taking over a business has some potential downsides too, such as:

• needing to make a big investment upfront

• paying for solicitors, surveyors, accountants, etc. to make sure everything’s kosher

• finding cashflow to get you through the early months

• paying or renegotiating any outstanding contracts

• the risk of taking on staff who are unhappy or resistant to change.

What does this all mean? when you’re taking over a business from someone else, you need to know exactly what you’re buying into.

So, before you get ‘Boss’ embossed on your business cards, and pixeled to your LinkedIn profile, use this checklist to help find a smart business investment and match for you.

1. Figure out what kind of business you want

Deciding on the right business comes down to a couple things.

Why are you buying a business?

If you’re going to be working there every day, it’s important that you enjoy what you do, the people you work with and the customers you help.

If you’re buying a business purely to secure your future, and will hire someone else to run it, then the most important considerations might be, “How profitable will it be?” and, “Will I be able to sell it for a good return in the future, if I want to get out?”

Do you want to be independent or a franchisee?

Buying a privately-owned, independent business means you are free from outside controls, such as a head office or shareholders, etc.

A franchise – like Smartline Mortgage Brokers, Kwik Kopy and Anytime Fitness – comes with its own set of pros and cons to consider.

What exactly is a franchise business?

Franchises are different to the four main types of businesses in Australia.

An established business owner, or franchisor, sells the rights to use their company name, trademarks and business model to independent operators, who are called franchisees.

In return, they might want a franchise fee, plus a percentage of sales and other fees.

Advantages of buying a franchise

You usually benefit from:

• the backing of a big business network

• training in business practices, sales, etc

• an established reputation and image

• proven management and work practices

• access to marketing, technology and support

Disadvantages of buying a franchise

As part of more uniform collective, you may:

• be under an agreement that can end any time

• lose control and opportunities to try unusual strategies

• be restricted to customers in a geographic area

• only be allowed to sell certain products and use franchisor suppliers

• suffer reputation damage if another franchisee does wrong

• have to share your profits with head office.

2. Research the business (in an almost creepy way)

Buying someone else’s business is a huge deal.

You are taking ownership and responsibility for something that someone else has spent many years doing all kinds of things in – selling, buying, negotiating, agreeing, promising, taking, giving and more.

So, you need to deep dive and learn the truth.

Know the strengths, weaknesses, opportunities and threats

That means:

• researching the market and competitors

• assessing business and industry/regulatory risks

• talking to customers and suppliers about their experiences

• standing across the road and seeing how many people walk in (if it’s a shop)

• asking friends to contact or use the business and provide feedback

• going online to read reviews, social media discussions and customer feedback.

Above all else, finding out why the owner is selling.

Carry out due diligence

Examine the business to assess whether it’s a good investment. Get a lawyer, accountant or business advisor involved as you:

• Pore over financials - income statements, tax returns, profit and loss statements

• Confirm the business structure e.g. sole trade, company, etc with ASIC

• Assess any plant, equipment, fixtures or vehicles included

• Review intellectual property, trademarks, patents, contracts (staff, client and supplier)

• Check for past, current or unsettled lawsuits

• Perform a credit check

3. Put a value on the business

When a product or service has no set price, then buyers and sellers will naturally have different opinions about how much it’s worth. So, you need to:

• Use some measurable value methods

• Get help from an accountant or business broker

The best way to value a business is to calculate three things:

• Net worth – assets minus liabilities (or the other way around!).

• Capitalised future earnings – expected profits it might generate in the future

• Costs beyond the asking price – set-up and running costs

Here are some things to take into account when valuing a business to buy:

• Reason for selling e.g., forced or happy but putting feelers out

• Business history – growth rate, milestones, challenges etc

• All due diligence findings/assets/liabilities (see Step 2 above)

• Performance – monthly sales turnover and profit for 3 years or more

• Major accounts - 10 largest clients, how many staying or leaving, etc

• Future projections – do they have a business plan that covers this?

• Products, materials, furniture, equipment, etc included

• Cost of any modifications required

• Situation with the premises lease

• OHS requirements and insurances

4. Make an offer (let’s get ready to haggle!)

Depending on the industry, business structure and how many people need to agree, negotiating the sale could be simple or complex.

Either way, you want to be well researched and prepared to ensure you get a deal you will be happy with.

Negotiating tips of buying a business

• Get advice from your accountant before you start

• Know the maximum you’re prepared to pay

• Start negotiating at the lowest reasonable and justifiable price.

• Never agree to the seller’s first price.

• Have separate lists of ‘non-negotiable’ and ‘nice to have’ inclusions

• Hide your emotions – whether it’s excitement or frustration

• Take your time finding the best outcome for both parties

• Be prepared to walk away if it’s not right

• If you’re feeling good, close that deal!

5. Sign purchase contracts to seal the deal

Things are getting exciting now. Once the legal bits are done, you’ll be an official business owner!

To make sure your agreement is legally binding, and that both parties clearly understand the terms and conditions of the sale, you need a purchase contract.

Your lawyer can draw up a draft that will go to the seller for their input. When everyone is happy, you sign the agreement.

The document should include:

• the price and payment method

• the seller’s involvement after purchase

• other conditions

• a restraint of trade covenant - to protect you from loss of business if the seller opens a competing business close by.

6. Pay for the business

Now all grunt work is done, you just need to work out how you’ll pay for the business. Is that all!?

If you have the money already, you won’t need to share profits with any investors or with banks for loan repayments.

If you don’t have the money, there are two popular options:

Pay the seller with cashflow

Sometimes, sellers will allow buyer to pay off the business over time rather than in a lump sum. You can do using revenue you make in the business.

If you seller is willing to go down this path, it says they’re confident the business can fund repayments.

Get financing from a lender

Before you contact a bank or other finance company, focus on the things that matter to them:

• Know how much you’ll need to borrow – for the sale and to get the business running.

• Put together a Business Plan – to show how you will manage expenses and stay profitable.

• Give them a repayment schedule – how much each month, whether you want it fixed or increased as you grow, etc.

• Show any relevant experience - in the industry or a similar business may seem less risky.

• Your assets - credit rating, current finances and the value of the business you are buying.

• Industry attractiveness – it’s growth potential, stability, volatility, etc.

As you can see, buying a business is like buying a house, on steroids.

Before you make an offer, you need to be completely confident of the business’s potential as well as its historical and current position – from a legal, financial and credibility perspective.

So, get out your pen, start ticking off this checklist and find the business that matches your career plans, financial goals and passion.

Looking at buying a business soon?

If you’re ready to choose a business:

• Use our checklist to help you discover if it’s the one for you.

• Talk to your accountant, solicitor or financial adviser.

• Ask them for help the legal, financial and tax specifics.

If you’d like some expert guidance on other areas starting a business:

• Attend one of our business-starter events.

• Book 1-1 business assessment and coaching sessions.

• Access a huge selection of Bayside BEC small business resources.