What to know before buying a business

Ask your self the question – Why?

What is that you are seeking from being a business owner – security, income, family time, control over ones own destiny?

This is the most critical question that you need to answer before the search for a suitable business. Becoming a business owner involves having to satisfy personal and financial goals. They can’t be separated.

“There is no point buying a business that you love if it will send you broke, and there is no point buying a business that makes a lot of money but you hate it, because you will send it broke”.

Finding the right balance between financial security and your personal goals is the biggest challenge. Our experienced team at Southshore Finance understand the emotional and financial attachment need to be balanced in these priorities, and can help guide you through the decision making process.

 

Get your finances in order

Determining your financial capability before searching for a business:

  • Make sure that any payment deferrals under COVID-19 have been cancelled and payments are up to date.
  • Close/reduce limits on credit cards and other personal facilities as these can have a significant detrimental impact on your ” capacity to borrow”.
  • Build up as your cash reserves, whether that be held in an offset account or by making additional debt repayments.
  • Most importantly, seek a no obligation assessment of you finance capabilities from an experienced commercial finance broker. Having a clear picture of your borrowing capacity will be invaluable at the negotiation table.

It is important to remember that it is not possible to get a pre-approval of finance for a business purchase, unlike a property purchase. There are just too many variables in business funding which make a pre-approval unworkable. However, it is possible to determine the boundaries that you are operating within, to make sure that you are investigating businesses within your reach.

 

Find a businesses for sale

Use reputable, professional business brokers, and also seek advice from as many other knowledgeable sources as possible, such as your commercial finance broker, accountant, lawyer, and others that you may know that have experience in business.

While there are many great websites, directories, online forums and even Facebook Groups dedicated to buying and selling businesses in Australia, always check with your professional team before any approach.

 

Conduct due diligence

A vendor may not release pertinent information until the offer has been accepted, making due diligence problematic. It is critical to have the right team on your side during this time to recognise and make you aware of any areas of concern. Any issues should be addressed in the Offer to Purchase and the contract dependent on resolution.

Bonus Tip: The Offer to Purchase should be made subject to various conditions, the most critical being a financial due diligence. This is where your accountant will have access to the detailed financial information of the business and be able to determine if the profits as reported are fair and reasonable. If the condition is not satisfied the contract will technically become void.

 

Offer to Purchase

It is important that the ‘conditions’ are correctly worded and provide you reasonable protection. Typical conditions include due diligence, finance, lease on premises, plant and equipment to be in good working order, and transfer of IP. A good business broker will prepare an Offer to Purchase that provides protection to both vendor and purchaser, but it is important to remember that the business broker is employed as an agent of the vendor. If in any doubt, engage the services of a good commercial lawyer.

 

Southshore Finance, the specialists in business finance can give you a good idea about what finance possibilities are available to you and what amount will be realistic to buy a business given your circumstances. For an obligation free phone consultation, contact us today.