One of the most critical elements when you’re buying a new business is carrying out all the due diligence checks to make sure it’s healthy.
But even more important than scrutinising the company’s financials, analytics and performance against industry benchmarks, is taking a long, hard look at yourself, says Peter Wallace, managing director of business brokers Endeavour Capital.
“A lot of people might be good at their professional trade, but they might not be so good at running a business, and looking after the paperwork and employees,” he said. “They have to make sure, too, that the business suits them because it’s always very much an extension of themselves.
“They have to talk to their family members to know they’re behind them, and ready to withstand the ups and downs and long hours, without it putting strain on relationships, and surround themselves with good advisors, like lawyers and accountants who know business.”
But once the honest self-reflection is out of the way, and there’s still a commitment to purchase, then it’s time to make sure the business really is going to be worth buying, and running.
Checking out the business
Getting to know the business’s true financial situation is of the utmost importance, rather than merely relying on the information the current owner is giving out. You need the key sets of profit-and-loss statements going back at least three years, from financial records, balance sheets and accounts to tax returns.
“You also need to know current fees, advertising fees, how much it costs to train the staff, how much it’ll cost for new equipment if you need it, ongoing fees and whether or not there are transfer fees associated with buying the business,” said Fred Schebesta, co-founder of business, financial and insurance experts Finder.
“It’s good to ask why the current owner wants to sell as they may know something you’re not aware of. So you need to do your research into the industry that you want to buy into and any competitor within a 10-kilometre radius. Get in touch with as many suppliers or previous customers as you can, to get the vibe of what you’re buying into.”
You certainly don’t want to find out, on your first day in charge, that your cafe has a terrible reputation for dodgy coffee or food, your tech business is known locally as a dud, or your homewares shop has built up an impenetrable barrier of ill will from past poor service.
There are many signs of a business being good and healthy, says Ian Jones, director of Merchant Business Brokers and vice-national chair of the Australian Institute of Business Brokers.
Among them are features like a loyal and long-serving staff with a positive team morale, growing revenue and increasing profitability, steady and controlled expenses and spending with limited waste or unnecessary spending. As well, there’ll hopefully be plenty of repeat customers, positive social media reviews and high star ratings online.
“In addition, you want good systems and processes to be documented so the business isn’t vulnerable to key staff leaving – including the current owner – and supplier agreements to be in place and in writing,” said Mr Jones.
“You also need to check the level of debtors and creditors and ensure that the business doesn’t have outstanding receivables, and that the business has a positive cash flow. Some businesses are seasonal, so it’s important to understand industry trends and business intricacies.”
Taking note of industry trends is particularly important, he says. For instance, a video store might not be such a good investment in these days of Netflix, taxi companies are a tough investment when competing with Uber, and anything that’s not up to the mark technologically is challenging if you’re trying to attract Millennial customers.
Looking to the future
When you’re examining a business that you like the look of, imagine yourself running it into the future. It might suit you now, but will it still be a good fit in two, five or 10 years’ time?
You might also be happy in your geographical location now, says Aaron Chuah, general manager of the Victorian office of LINK and independent auctioneer at EYS Auctions, but might you want to move later, and would that create huge problems?
“You need to look at the business in terms of the future, too,” he says. “Look at the term of the lease, and see how much is left in place with the landlord. Are there any increases in rent coming up, or likely to come up later?
“And will there be any repercussions when the existing owner moves on? They might have all the licences and certificates and qualifications for their business, which you may not have. They also might not have been drawing a wage from the business, and you might plan to which will affect the net profit, or you might just be an investor in the business so you’ll have to pay someone else that wage to run it.”
It’s also essential to consider how you might be able to add value to the business going forward, move it in a new direction, or enter other markets. Just as when buying a house, you want to know if there’s scope to extend or improve it, you need also to think about a business’s potential for growth.
1. Have all the appropriate due diligence reviews been undertaken?
2. Are net profit margins increasing, rather than declining, year on year?
3. Are BAS and past tax bills paid and current?
4. Are all staff correctly paid, with superannuation contributions current?
5. Are all key telephone numbers, email addresses, websites and software owned by the business and to be transferred to the new owner?
6. Does the business have good mentors, management structures and financial safeguards in place as well as human resources policies and contracts?
7. Does the company have a good pipeline of future business?
8. Is there a current business plan and have there been strategic reviews carried out on an annual basis?
9. Is the business receiving plenty of referral business from current customers and suppliers?
10. Are all licences to operate current and appropriate?
Source: Ian Jones, vice-national chair of the Australian Institute of Business Brokers, and director, Merchant Business Brokers