Step 3: Analysing the business

After you've found a business to buy you need to make sure that you are getting what you pay for. You will need to:

Due diligence

A diligent buyer will carry out a thorough check of the business and identify whether it is likely to succeed in the future. This process is called due diligence.

To evaluate a business you will need at least the following information:

  • A trading or profit and loss statement for the last two years in which the vendor has owned the business.
  • A balance sheet to identify assets and liabilities.
  • A list of plant, equipment, fixtures and fittings, which the owner intends to sell and a current valuation and proof of any applicable warranties or guarantees. (Proof of ownership will need to be established if you decide to buy).
  • Details of any stock sold with the business and how it will be counted and valued at settlement.
  • If the premises are leased, a copy of the lease agreement. For more information on leasing go to the leasing commercial premises section.
  • If it is franchise ask the vendor for a copy of the franchisor's disclosure statement. This is required by the Franchising Code of Conduct. For more information on franchising visit the buying a franchise section.
  • Privacy obligations such as employee information, customer information, trading partners/business associates information and marketing files under the Privacy Act 1988 (Cth). See the Office of the Privacy Commissioner's information sheet Application of Key National Privacy Principles (NNPs) to Due Diligence and Completion when Buying and Selling a Business 

Do not sign any offers or pay any monies until you have been provided with all of the above, you have assessed the business and taken independent professional advice.

Reducing the risk

Check the following things to reduce the risk in buying a business

  • Get certified financial statements which are correct and properly represent the trading figures of the business being sold. Figures provided under a disclaimer indicate that the vendor or the person preparing them is either unwilling or unable to vouch for their accuracy.
  • Make sure that any plant and equipment is in good working order. You may need to consult a qualified tradesperson. Have motor vehicles and machinery mechanically inspected.
  • Check that vehicles are licensed, and when the licences expire.
  • Make sure that there are no encumbrances on motor vehicles, motorbikes, boats or farm machinery. You can check online on the Personal Properties and Securities Register.
  • Have any plant and equipment independently valued.

How to value the business to ensure a fair price

Here are three methods used to value a business:

1. Return on investment

This method measures the return on investment (profit before owners salary) received from an investment (the purchase price) and is calculated using the following formula:

ROI   =   net profit x100
             price

2. Asset value

This technique adds the assets of the business (for example stock, plant and equipment) to a goodwill figure to arrive at the price of the business.

3. Market value

This method is based on multiplying the turnover of the business by an industry multiple. This technique is mainly used for professional practices such as legal, accountancy and medical practices. It is rarely used for retail businesses.

Existing employees

If staff will transfer with the business, you will need information on the many issues and legal responsibilities associated with employing staff. Go to the Employing People section for more information.

Taxation

Make sure that GST on the sale has been properly considered. GST will generally be payable unless the business is sold as a going concern and the Australian Taxation Office (ATO) criteria are met. Requirements include an agreement in writing that the supply is of a going concern. Professional advice is recommended on this issue.

Your accountant will be able to advise you on the vendor's financial statements, the market value of the business, the GST, Capital Gains Tax and other tax issues, and appropriate business structure options, and to assist with the budgets, cashflow forecasts, and projected financial statements for your feasibility study.

For more information visit the Australian Tax Office website.

What's next…

 

Related Information

Business Brief to view:
Buying a Business

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