11 Questions To Ask When Buying A Business

I’ve written over 3,300 business plans so I’ve seen the excitement and fear that comes with buying a business. It’s a big step, one that can lead to great success or big challenges. That’s why I’m sharing my knowledge to help you through this process.

A business broker can be an essential resource in this journey, facilitating transactions and providing access to listings while helping you discern between reliable and questionable brokers.

Buying a business in Australia is a popular way for entrepreneurs to get into the market quickly. According to the Australian Bureau of Statistics, there were over 2.4 million active businesses in Australia as of June 2022, with thousands changing hands every year. It’s a busy market with plenty of opportunities but also plenty of risks.

Before you jump into business ownership, you need to arm yourself with the right questions. These questions will help you get the information you need about the business you’re considering so you can make an informed decision.

Let’s get into the top 11 questions you MUST ask before buying a business.

1. Why is the current owner selling the business?

This is a big one. Why is the business owner selling? Are they retiring, relocating or pursuing other interests? Or are there underlying issues with the business that are causing the sale? The answer to this question will give you valuable insight into the business’s health and potential.

In my experience most business sales in Australia are due to retirement. The Australian Small Business and Family Enterprise Ombudsman reports that the average age of small business owners in Australia is 49 years old and many are nearing retirement age. But you need to dig deeper and verify the reasons given.

If the owner cites personal reasons like retirement or relocation, ask for documentation to support this claim. If they’re moving interstate they might have property purchase documents or job offers in their new location. If the reason is business related like declining profits or increased competition you’ll need to scrutinise the financials and market conditions more closely.

Remember the reason for sale can impact your negotiation strategy and the value of the business. A business being sold due to the owner’s retirement might command a premium price while a struggling business might be available at a discount but requires a lot of work to turn around.

2. What’s included in the sale?

This seems like a simple question but many buyers overlook the details of what they’re actually buying. Are you buying just the business name and customer list or does the sale include physical assets, intellectual property and ongoing contracts?

It is crucial to understand the business operations included in the sale, as this will impact financial performance and the overall efficiency of the company.

In Australia business sales are either asset sales or share sales. In an asset sale you’re buying specific assets of the business which might include equipment, inventory, customer lists and goodwill. In a share sale you’re buying the company itself including all its assets and liabilities.

Ask for a comprehensive inventory of all assets included in the sale. This should include:

• Physical assets: Buildings, equipment, vehicles, inventory

• Intangible assets: Trademarks, patents, copyrights, software licenses

• Customer lists and contracts

• Supplier agreements

• Lease agreements for premises or equipment

Don’t forget to ask about digital assets as well. In today’s digital age a business’s online presence can be a big part of its value. This includes:

• Website domain names and hosting

• Social media accounts and followers

• Email lists

• Digital content and online courses

Make sure to clarify what’s owned outright and what’s leased or financed – we can assist with brokering business loans and asset finance if needed. For leased assets ask if the leases are transferable and what the terms are.

Also find out what’s not included in the sale. Are there any assets the current owner plans to keep? For example they might want to keep a company car or certain client relationships. These exclusions can impact the value of the business and your ability to run it successfully post purchase.

3. Can I see the last three years of the business’s financial statements?

Financial due diligence is the most important part of buying a business. Requesting the last three years of a business’s financial statements, including tax returns, income statements, and balance sheets, is standard practice in Australia and will give you a clear picture of the business’s financial health and trends over time.

The financial statements you should review are:

1. Income statements (also known as profit and loss statements)

2. Balance sheets

3. Cash flow statements

These will give you an insight into the business’s revenue, expenses, profitability, assets, liabilities and cash flow. Look for trends in these numbers. Is revenue growing, stable or declining? Profit margins? Are there any unusual spikes or dips that need explanation?

In Australia businesses are required to keep financial records for at least five years. If the current owner is reluctant to provide these documents or only gives you limited information this should be a red flag.

When reviewing these statements look for:

• Revenue trends: Is the business growing, stable or declining?

• Profit margins: How do they compare to industry averages?

• Operating expenses: Are there opportunities to reduce costs?

• Debt: How much does the business owe and to whom?

• Working capital: Does the business have enough cash to cover its short term obligations?

Also compare the financials to industry benchmarks. The Australian Taxation Office provides small business benchmarks for various industries which can be a useful reference.

Remember while these financials are important they only tell part of the story. You’ll also want to review tax returns, bank statements and other financial documents to get a full picture of the business’s financial health.

4. Who are the key employees and will they stay on after the sale?

Many businesses are built on the skills, knowledge and relationships of its key employees. Understanding the team you’ll be inheriting is critical for a smooth transition and ongoing business success. It is equally important to understand the day-to-day operations and how key employees contribute to them.

In Australia employees’ rights are protected when a business changes hands. The Fair Work Act 2009 outlines the obligations of both the old and new employers in a transfer of business situation. Generally employees’ terms and conditions of employment transfer with the business unless there’s a specific agreement otherwise.

Ask the current owner for:

• An org chart showing the structure of the business

• Job descriptions for key roles

• Information about any employment contracts or agreements

• Details of any workplace agreements or enterprise bargaining agreements

Look closely at roles that are critical to the business or customer relationships. These might be:

• Sales staff with strong client relationships

• Technical experts or skilled tradespeople

• Managers with deep industry knowledge

Also understand the company culture and how employees feel about their work. A positive culture is an asset, a negative one is a liability.

Ask the current owner if you can meet with key employees before the sale is finalised. This will give you insight into their motivations, concerns and future plans. However be aware this can cause anxiety amongst staff if not handled sensitively.

Remember some key employees may have clauses in their contracts that allow them to leave if the business changes hands. Make sure you understand any such provisions and have a plan to retain critical staff.

5. Who are the main customers and suppliers?

Understanding the business’s relationship with its customers and suppliers is critical to assessing its stability and growth potential. Additionally, researching similar businesses recently sold can provide valuable insights into the market value and help in determining fair pricing.

Start by asking for a list of the top customers by revenue. In many businesses the 80/20 rule applies – 80% of revenue comes from 20% of customers. Identify these key accounts and ask:

• How long have they been customers?

• What’s the nature of their relationship with the business?

• Are there formal contracts in place?

• What’s the potential for growth with these customers?

Be careful of over-reliance on a small number of customers. If a large percentage of the business’s revenue comes from one or two customers this is a risk. What would happen if one of those customers left?

On the supplier side ask:

• Who are the main suppliers?

• Are there exclusive agreements or special pricing arrangements?

• How stable are these relationships?

• Are there alternative suppliers if needed?

In Australia relationships with both customers and suppliers can be influenced by geographic factors due to the country’s size. For example a business in Perth may face different supply chain challenges than one in Sydney. Consider how location impacts these relationships.

Also consider the business’s position in the overall supply chain. Are there any potential disruptions on the horizon? The COVID-19 pandemic showed us the importance of resilient supply chains so consider how the business coped with recent global challenges.

Remember to ask about any seasonality in customer demand or supplier availability. Many Australian businesses experience seasonality whether it’s tourist seasons, agricultural cycles or other factors.

6. What’s the competitive landscape like?

Understanding the competitive environment is critical to assessing the business’s market position and future prospects. In Australia’s diverse and often geographically isolated markets the competitive dynamics can vary greatly from one region to another.

Ask the current owner:

• Who are the main competitors?

• What’s the business’s market share?

• What are the business’s unique selling points?

• Are there new entrants or potential disruptors in the market?

Use IBISWorld reports or Australian Bureau of Statistics data to get a wider view of the industry. Look for:

• Market size and growth trends

• Key drivers in the industry

• Regulatory environment and any changes on the horizon

• Technological trends that will impact the industry

Consider the business’s position in the market. Is it a low cost provider, a premium brand or somewhere in between? How sustainable is this position given the competitive landscape?

Don’t forget to look beyond direct competitors. Are there substitute products or services that could threaten the business? For example a traditional bookstore might face competition not just from other bookstores but also from online retailers and e-books.

Also consider any industry associations relevant to the business. Organisations like the Australian Chamber of Commerce and Industry or industry specific bodies can provide valuable information on market trends and challenges.

Competition isn’t always bad. A crowded market might mean strong demand, a lack of competitors might mean limited growth. The key is to know how the business stands out in its competitive landscape.

7. What licenses, permits or regulations apply to this business?

Australia has a complicated regulatory environment with different requirements by industry, location and business size. Knowing the legal and regulatory landscape will ensure you’re not inheriting any compliance issues or hidden costs.

Ask the current owner for a list of all licenses, permits and registrations the business currently holds. These might include:

• Business name registration

• Australian Business Number (ABN)

• Tax registrations (GST, PAYG withholding etc.)

• Industry specific licenses (e.g. liquor licenses, food handling permits)

• Local council permits (e.g. for signage, outdoor seating)

• Environmental permits

• Work health and safety certifications

Check all of these are current and transferable. Some licenses may be tied to the current owner and will need to be re-applied for when the business changes hands.

Next look into any upcoming regulatory changes that will impact the business. For example is there new environmental legislation on the horizon that will require significant investment in new equipment?

Don’t forget about intellectual property. If the business relies on trademarks, patents or other forms of IP ensure they are registered and protected. The IP Australia website is a good resource to check trademark and patent registrations.

Also consider any industry codes of conduct or voluntary standards the business adheres to. While not legally required these can be important for customer trust and industry reputation.

Remember compliance isn’t just about the paperwork. It’s about ongoing compliance. Ask about the business’s processes for staying compliant and managing regulatory risk.

8. What’s the state of the business’s technology and systems?

In today’s digital age a business’s technology infrastructure can be a big asset or a big liability. Knowing the state of the business’s IT systems, software and digital presence is critical.

Start by asking:

• Hardware: What computers, servers and other equipment does the business use? How old are they and when will they need replacing?

• Software: What software does the business use? Are the licenses transferable? Is the software up-to-date?

• Data management: How is customer and business data stored and protected? Is the business compliant with Australian privacy laws?

• E-commerce capabilities: If applicable how robust is the business’s online sales platform?

• Cybersecurity: What measures are in place to protect against cyber threats?

Don’t forget about the business’s online presence. This includes:

• Website: Is it modern, mobile friendly and easy to update?

• Social media: What platforms is the business on? How engaged is the audience?

• Online reviews: What’s the business’s reputation on Google, Facebook or industry specific review sites?

In Australia the National Broadband Network (NBN) has changed the digital landscape for many businesses. Ask about the business’s internet connection and if there are any plans or needs for upgrades.

Also consider any industry specific technology. For example a manufacturing business might have specialized machinery, a professional services firm might have particular software tools.

Remember technology isn’t just about the tools themselves but how they are used. Ask about staff training and technology adoption within the business. A business with great systems that aren’t being fully utilised might be an opportunity for quick wins post acquisition.

9. What’s the growth potential?

While historical performance is important as a potential buyer you are more interested in the future. Knowing the business’s growth potential is critical to assessing its long term value.

Planning for the growth of the newly acquired business is essential to ensure smooth integration and to mitigate risks such as operational disruption and staff integration challenges.

Start by asking the current owner:

• What growth opportunities have they identified but not pursued?

• Are there new markets or customer segments the business can get into?

• Are there new products or services?

• Can the business expand geographically?

Also look at broader market trends. Is the industry growing? Are there demographic or economic shifts that will create new opportunities? Resources like the Australian Bureau of Statistics or industry reports can be a good source of data.

Think about the business’s scalability. Can it handle a big increase in demand without a corresponding increase in costs? This might involve looking at:

• Production capacity

• Supply chain flexibility

• Staffing structure

• Technology infrastructure

Don’t forget about potential synergies if you have existing business interests. Can the acquisition create opportunities for cross selling, shared resources or economies of scale?

Also consider any growth constraints. These might be:

• Regulatory limits

• Geographic constraints

• Resource limitations (e.g. skilled labour shortages)

• Capital requirements for expansion

Remember growth doesn’t always mean getting bigger. For some businesses growth might mean improving profitability, diversifying revenue streams or enhancing brand value.

Lastly consider the business’s current market position. Is it a market leader with limited growth opportunities or an up and comer with lots of potential? Knowing where the business is in its growth cycle will help you assess its future prospects.

10. Are there any pending legal issues or outstanding debts?

Finding out any legal or financial liabilities associated with the previous owner is critical before finalising a business purchase. These can have a big impact on the value of the business and your ability to run it post acquisition.

Ask the current owner about:

• Any current or pending lawsuits

• Outstanding debts or loans

• Tax liabilities

• Employee disputes or workers compensation claims

• Environmental liabilities

• Contractual obligations or disputes

Get them to provide documentation to support their answers. This might be:

• Recent legal correspondence

• Loan agreements

• Tax assessments

• Employment contracts and records

In Australia you can also do your own due diligence through public records. This might be:

• Searching the Personal Property Securities Register for any security interests registered against the business’s assets

• Checking court records for any litigation involving the business

• Reviewing the business’s credit report

Look out for contingent liabilities – potential future obligations that depend on uncertain events. These won’t show up on the balance sheet but could be a big issue for the business.

Don’t forget about intellectual property issues. Are there any disputes over trademarks or patents? Is the business using any unlicensed software or content?

Also investigate the business’s insurance coverage. Are there any gaps that could leave you exposed to big risks?

Remember in an asset sale you generally don’t inherit the seller’s liabilities (although there are exceptions especially around employee entitlements). But in a share sale you’re buying the company and all its liabilities. Make sure you know which type of sale you’re in and what that means for you.

Finally get a lawyer to review all contracts and legal documents. They can pick up on red flags or issues you might miss.

11. What support will the current owner provide during the transition?

A smooth transition is critical for business continuity and preserving value. The current owner’s involvement during this period can make all the difference when transitioning to owning your own business.

Ask the owner about:

• How long they’ll stay on after the sale

• What kind of training or knowledge transfer they’ll provide

• If they’ll be open to a consulting arrangement post sale

• Any non compete agreements they’ll sign

In Australia this is often referred to as a handover period. This can be anywhere from a few weeks to several months.

So, what now?

Buying a business is a big process and requires thought and research. The 11 questions we’ve covered are just the starting point, not the whole journey to business ownership. Remember each of these questions can lead to more questions and more research. Don’t be afraid to drill down, ask for more info or get professional advice when needed. Your research now can save you headaches and financial losses later.

As you go through this process, remember buying a business is not just about the numbers on a balance sheet. It’s about understanding the story behind the numbers, the people who run the business and the potential for growth and success. In the Australian market with all its challenges and opportunities you need to consider factors like location, regulatory environment and market dynamics. What works in Sydney may not work in Perth or regional Queensland.

Throughout your due diligence process keep open and honest communication with the current owner. Their willingness to provide information and support is a good indicator of the business’s health and potential.

Finally trust your instincts. If something doesn’t feel right or you’re not getting the answers you want to your questions, it’s okay to walk away. There are always other opportunities in the Australian business landscape. Buying a business can be a great adventure, a way to be an entrepreneur with a head start. By asking these questions and doing your research you’ll be ready to make an informed decision on your business purchase.

Remember this is not just a financial transaction – it’s the start of your business ownership journey. Choose well, plan well and you’ll give yourself the best chance of success.