What do you choose?

It is best to look for a business in which you or one of your partners has experience in operating. If you need financing banks will feel more confident knowing you will manage the business well.

If you want to try your hands at a completely new kind of business it is prudent to retain the few key staff who know the computer system and financial set-up, have the relationships with major customers and the essential skills required to maintain the same level of service quality and output.

What to look out for

Do your due diligence by looking closely at the financials and look out for the obvious red flags:

1. Have the sales and net profit remained steady over the most recent 3-5 years?
2. Given the number of employed full-time and part-time staff plus subcontractors engaged with ABNs, are the salary/wages and superannuation contributions reasonable? Are the owners being paid market rate salaries in the expense computation or do they draw on the net profits for personal needs?
3. Do some of the expense items look more like personal expenses sneaked in to reduce profit tax exposure (e.g. unusually high travel)?
4. Is the rent a reasonable percentage of business expenses given the type of business and size of the premises.
5. Is the asking price mainly composed of goodwill or includes plant/equipment and cost of upgrading the premises? Goodwill is generally calculated at 2-3 times the average net profit of the last 3 years. Stock (especially retail businesses) is always calculated separately from the price of the business and evaluated close to date of settlement.
6. A profitable business is one where the net profit is around 12-15% of gross sales.

Further investigation

Look at online reviews of the business to see its public standing. Find out how long the current owner has been operating the business and why they are selling. Ask the seller to allow you to be present for the busiest days of the week to observe the customer traffic and sales – particularly if it is a retail or eatery business.

If the business provides mainly services, find out the names of their main customers and if their contracts are ongoing and long term.

Check the terms and conditions of the current lease and see if the lease will be renewed on the same terms with flexible extensions. Enquire from the landlord or their land agent if there are plans to sell or renovate the building.

In the sale contract request a reasonable transition/ handover period to familiarise with daily transactional activities and receive personal introduction to suppliers and regular customers.

Where one is buying the brand name of business make sure it is registered and can be formally transferred.

When one is buying the incorporated entity including its debts and liabilities make sure a full credit check such as PPSE search is done. A term of purchase should include a precondition for long term debts (e.g. loans from banks or hire purchase of large equipment) to be settled before the completion date and short term debts (such as supplier invoices that have 14-30 days credit) to be deducted from the settlement sum.