Do you want to become your own boss, if yes then one of the best ways to do so is buying an existing business? However, the process involves in buying an existing business has its own fair share of challenges. In this article, we will give you step-by-step tips on how to buy an existing business in Australia.
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Step 1: Research
The first important thing to do before buying an existing business is researching to know more about it and whether it is the right choice to buy it. Do your research to know how the business is currently performing, whether it has the potential to grow, challenges you are likely to face and how to overcome, the cost involved in ruining the business, and much more. When conducting your research don’t forget to perform a quick search with the Australian Securities and Investment Commission to find out the legal structure of the business that you are planning to purchase.
Step 2: Conduct due diligence
After doing your research about the business, the next crucial step is conducting due diligence. Due diligence refers to the process of performing a thorough examination of a business to know whether it is a good investment or not. Due diligence is usually conducted once you have agreed with the seller about the purchase of the business and It is performed before you sign the agreement to make it legally binding.
Due diligence should be performed with help of experts including lawyers, accountants, and an experienced bossiness advisor. Important things that must be analyzed in detail when conducting due diligence include balance sheets, tax retunes, income statements, stock level, profit, and loss statements, and details about fixtures, plants, equipment, and vehicles. You also need to analyze legal matters like intellectual property, registered patents, trademarks, any past or current unsettled lawsuits, and existing contractual obligations and contracts with third parties such as suppliers and customers.
Step 3: Value the business
Once you have conducted due diligence and you are sissified, the next step is determining the value of the business. The best way to do this is by benchmarking to know what was paid for by businesses that are similar to what you intend to purchase. Important things to consider when determining the value of the business include the value of tangible products such as machines and equipment, and the value of intangible assets such as the existing customer base, brand reputation, location, and staff quality.
Two methods can be used to calculate the business value. The first method includes calculating the difference between assets and liabilities, while the second method involves calculating the value based on the projected future earnings.
Step 4: Make an offer
Once you have determined the value of the business the next step is making an offer to the seller. Your negotiations skill matters a lot at this point. Before you start the negotiation process, determine the highest price you are will to pay for the business and ensure that you don’t go beyond that no matter what. When you begin the negotiation process, start with your lowest price but make sure it is reasonable so that the other party does not think that you are not serious. Starting with a lower offer then increasing it gradually until you strike a deal is a better strategy when negotiating rather than starting with your highest offer. Other important tips to take note of when negotiating include: not agreeing with the seller’s first price, not sounding desperate, and running into negotiation. If you strike a deal that you are comfortable with, then go for it. However, if you are not comfortable with the deal, don’t be shy to walk away.
Step 5: Arrange purchase contract
If you are satisfied with the deal, the next step is making things official. This means you need to formulate a purchase contract to make the agreement legally binding. Before you sign the agreement, ensure you read and understand everything written on the paper. Also, don’t sign the purchase agreement alone. Ensure that your lawyer and accountant accompany you. They will give you tax and legal advice that will help you make an informed decision when signing the contract.
Important things that should be included in the purchase contract include:
- Price
- Payment method
- A restraint of trade covenant- this clause will help to protect you as the new business owner against any loss, in case the seller opens a competing business).
- The seller involvement after closing the deal
- Any other conditions-this include this such as what happens if the seller provides inaccurate information.
Step 6: Finance the business purchase
Before you sign the contract to make the deal legally binding, you need to make necessary arrangements on how you will finance the business purchase. There are a variety of options that you can utilize when it comes to financing the business purchase. For instance, you can take a loan from a financial institution. There are various types of loans that financial institutions offer to finance a business purchase. The most common ones include secure loans where the loan is secured with a business asset and unsecured loans where the business purchase is financed without collateral.
If you are planning to take a loan from a bank, you need to ensure that you have a detailed business plan. Additionally, you need to have a constant positive cash flow and a good credit rating. A financial intuition will only finance your business purchase if you show them that you can repay the loan. This means you need to table solid evidence that shows you will be able to turn the business into a profit-making venture.
The terms of the loan including the interest rate and repayment terms depend on the type of loan that you have taken and the financial institution that you are dealing with. If you can finance the purchase with your own money, then that is even better because you will not share profits with financial institutions.
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Conclusion
We hope that the information provided above will help make your next business purchase seamless. Many things come into play when purchasing a small business. If you want to make the whole process simple and stress-free, make sure you gather as much information as possible about the business and the process involved in acquiring a business that is already running.
