If you’re reading this, you’re probably thinking about buying an existing business. And perhaps you’re feeling both excitement at the opportunity, but fearful of making a mistake?

As someone who’s helped thousands of business owners over 15 years, I thought I’d share my ultimate checklist for buying a business for Australian business owners. With luck this will save you some worry and make the whole process clearer and easier.

Why Buy an Existing Business?

Before we get into the details, let’s talk about why buying an existing business is a good idea. According to the Australian Bureau of Statistics, in 2020-21, there were over 2.4 million actively trading businesses in Australia. That’s a lot of options! Here are four reasons why buying an established business might be the way to go:

1. Immediate cash flow: Existing businesses have customers and revenue already.

2. Established brand and reputation: You’re buying a known entity with an existing customer base.

3. Proven business model: The business has already shown it can survive in the market.

4. Existing systems and processes: You don’t have to reinvent the wheel; the operational framework is already in place.

Now, let’s get into the checklist!

Define Your Goals and Criteria

Before you start looking at businesses for sale, you need to define what you’re after. Ask yourself:

• What industry?

• What size business?

• What’s my budget?

Am I looking for a hands-on role or a more passive investment?

For example, a recent client wanted to be hands on for the first two years and was looking to buy a cafe in Melbourne with:

• Annual turnover of at least $500,000

• A prime location with high foot traffic

• Potential for growth and expansion

Assemble Your Dream Team, Including a Business Broker

Buying a business is not a solo sport. You’ll need a team of professionals to help you through the process. Here’s who you should have on speed dial:

• Accountant: To review financials and tax implications

• Lawyer: To review contracts and provide legal advice

• Business broker: To find suitable businesses and negotiate deals

• Commercial loan broker: To help with funding options

Pro tip: Find professionals with experience in business acquisitions in your target industry.

Find Businesses

Now get started! Here’s where to find businesses for sale in Australia:

• Online marketplaces like BusinessesForSale.com.au or Seek Business

• Business brokers

• Industry associations

• Local chambers of commerce

• Networking events

Don’t limit yourself to just one source. Broaden your net to find the best opportunities.

Initial Assessment

Once you’ve found some businesses, it’s time for an initial assessment. Here’s what to look at:

• Financial performance: Revenue, profit margins, growth trends

• Industry outlook: Is the industry growing or declining?

• Location: Is it suitable for the business?

• Reason for sale: Why is the owner selling?

• Competition: Who are the main competitors?

One client of ours was looking at buying a boutique hotel in Byron Bay, so I helped them with a business plan that looked at tourism trends in the area, occupancy rates over the past five years and the impact of Airbnb on the local market. This all went towards preparing cash flow forecasting documents.

Use our Buying an Existing Business Calculator to see how options compare:

(Calculator is for illustration purposes only. Talk to your finance professional).

Write a Letter of Intent

If you’re serious about a business, it’s time to write a Letter of Intent (LOI). This document outlines your interest in buying the business and usually includes:

• Proposed purchase price or price range

• Terms of the deal (e.g., all cash, part vendor finance)

• Request for a due diligence period

• Confidentiality agreement

Your lawyer can help with this document. Remember, the LOI is generally non-binding but sets the scene for negotiations.

Due Diligence Process

Due diligence checklist buying a business is an essential tool to guide prospective buyers through the evaluation process. Now’s the hard work. Due diligence is where you verify everything the seller has told you and find any potential issues. Here’s what to look at:

a) Financial Information

• Profit and loss statements for the past 3-5 years

• Balance sheets

• Tax returns

• Cash flow statements

• Sales records

• Accounts payable and receivable

Look for trends, inconsistencies and any red flags. A client of ours was going to pull out of the purchase of a manufacturing business in Adelaide when they noticed a big drop in profits the previous year. Turned out it was due to a one-off equipment upgrade which actually improved efficiency in the long run.

b) Legal and Organisational Structure

• Company registration documents

• Shareholding structure

• Licenses and permits

• Pending litigation or legal issues

c) Assets and Equipment

• List of all assets included in the sale

• Condition of equipment

• Any outstanding loans or leases on equipment

d) Intellectual Property

• Trademarks, patents, copyrights

• Proprietary technology or processes

e) Employees

• Organisational chart

• Employment contracts

• Superannuation obligations

• Any outstanding employee issues or disputes

f) Customers and Suppliers

• Customer list and sales data

• Supplier contracts

• Any customer or supplier concentration risks

g) Lease Agreements

• Terms of current lease

• Options for renewal

• Any restrictions on business operations

h) Market and Competition

• Market share

• Competitive landscape

• Industry trends and challenges

Remember, due diligence is not just about finding problems; it’s also about finding opportunities for growth and improvement.

Valuation

Now you have a clear picture of the business, it’s time to value it. There are several ways to value a business:

• Asset-based valuation

• Earnings multiple

• Discounted cash flow

• Industry-specific metrics

When using asset-based valuation, it’s important to assess both tangible and physical assets to ensure accurate business valuation.

Get a professional business valuation to support your offer price. The Australian Institute of Business Brokers (AIBB) can find you an accredited business valuer if you need one.

Negotiate the Deal

Now you have your due diligence and valuation, you’re ready to negotiate. Key things to negotiate:

• Purchase price

• Payment terms (e.g., lump sum, instalment payments, earn-outs)

• Assets and liabilities included in the sale

• Non-compete agreements

• Transition period and training

Remember everything is negotiable. A recent client that bought a logistics business in Brisbane negotiated for the seller to stay on for 6 months to ensure a smooth transition and transfer of key client relationships.

Get Business Financing

Unless you have enough cash to buy the business outright you’ll need to get business financing. Options include:

• Business loans

• Vendor finance

• Investors or partners

• Government grants or programs

The Australian Government’s business.gov.au website is a great resource for information on business grants and support programs.

It almost always makes sense to engage a professional business finance broker from the outset. To get a business acquisition loan you’ll also need a bank loan business plan and cash flow projections.

Review and Sign the Contract

Once you’ve agreed to terms your lawyer will draft (or review) the sale agreement. Make sure to check:

• Assets and liabilities included/excluded from the sale

• Any warranties or indemnities

• Conditions precedent (things that must happen before the sale can occur)

• Restraint of trade clauses

Take your time with this step. A client we worked with almost missed a clause about outstanding tax liabilities. That’s not a mistake you want to make!

Prepare for the Handover

As you get closer to the settlement date start planning for the handover. This includes:

• Notifying employees, customers and suppliers

• Transferring licenses and permits

• Setting up new bank accounts and merchant facilities

• Review and potentially renegotiate contracts

• Plan any immediate changes or improvements

A client that bought a construction supplies business in Hobart spent 2 weeks before settlement meeting key customers and reassuring them about the continuity of service.

Close the Deal and Take Over

And then the big day arrives! On settlement day:

• Make sure all conditions precedent are met

• Transfer funds

• Sign all documents

• Get the keys, passwords and other access details

Job done! You’re a business owner.

Post-Acquisition Integration

You’re not done once you’ve taken over. The first 100 days are critical for a smooth transition. Focus on:

• Communicating with staff and addressing any concerns

• Meeting key customers and suppliers

• Implementing any planned changes

• Monitoring cash flow closely

For example, you might want to hold daily stand-ups with the team for the first month to ensure everyone was aligned and to quickly address any issues.

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FAQs

What is the biggest risk in acquiring a business?

The biggest risk in acquiring a business is often hidden liabilities. These can include undisclosed debts, pending lawsuits, or regulatory issues not apparent during initial due diligence. Thorough investigation and professional assistance are crucial to mitigate this risk.

How to tell if a business is a good buy?

A business is a good buy if it has:

• Consistent or growing financials

• A strong market position

• Growth potential

• A diverse customer base

• Valuable assets or IP

• A skilled workforce

• Operates in a growing industry

• Is reasonably priced compared to industry benchmarks

What are the disadvantages of buying an existing business?

Disadvantages of buying an existing business include:

• Higher upfront costs

• Potential inherited problems

• Difficulty changing established processes

• Risk of hidden issues

• Steep learning curve

• Possible resistance from existing staff

• Risk of an outdated business model

How much deposit do I need to buy an existing business?

The deposit for buying an existing business typically ranges from 10% to 30% of the purchase price. The exact amount depends on factors like the industry, business performance, your financial situation, and the lender’s requirements. In Australia, banks often require a 20-30% deposit for business loans. If this isn’t something you have, talk to our team about your specific needs and we’ll see if there are other options.

Ready to get started?

Buying an existing business can be a complicated process but with proper planning and due diligence it can also be very rewarding. This checklist should be your guide but remember every business purchase is unique. Be prepared to adjust as you go.

So there you have it, buying an existing business isn’t as scary as it seems. Remember help is available. Our team here at Smart Business Plans has worked with more than 3,300 Australian business owners.

Reach out if we can help!

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