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Things to know before buying small business in Australia

Admin 26/10/2018

Things to know before buying small business in Australia

Buying an established small business in Australia can be very tricky. There are many risks involved and you must consider various factors before finalizing the buying decision. We will cover various points of consideration that must be taken into account before buying an established small business in Australia.

Buying an established and existing small business has various attached advantages and disadvantages. However, it is equally risky to start a brand new small business or buy an established small business. Therefore, a buyer must conduct proper evaluation before buying an established small business in Australia.

Is it good to buy an existing small business in Australia or start a new one

The answer is not a simple as yes or no. In buying an existing small business, the entrepreneur will have to inherit and compromise on various things that are already attached to the existing small business. On the other hand, the case is different for starting a new one as the small business owner will have complete authority to decide on different business matters. Such matters may include the location, the terms and conditions with the supplier, employees and other persons and organisations attached to the business. Both of the business decisions have their own risks and none guarantee the success of the small business.

Things to consider before buying an established small business

Buying an existing business is a very crucial decision, as the buyer inherits the attached issues and capacities. The existing business may need some overhauling or restructuring for which you may require some professional help. Oculus ConsultantsArmstrong and ShawZintel and Eagle Business Solutions are some of the business consultants who can help the buyer of the small business to assess the business restructuring and overhauling needs.  Additionally, the buyer needs to jot down all the important elements that must be considered before taking a final decision to buy an existing small business.

List down all the advantages and disadvantages

It is important to write down the advantages and disadvantages attached to the existing small business. This involves a critical analysis of the existing arrangements the small business has, which may include:

  • Location
  • Existing staff and agreements
  • Pricing
  • Plant and equipment
  • Inventory
  • Existing lease, mortgage and other financial arrangements
  • Business image
  • Relationship with suppliers and distributors
  • Consumer base
  • Marketing strategies
  • Agreements
  • Past or existing disputes

There might be other facts specific to the small business you intend to buy in Australia. So, you can add up your questions and specifics in the above list. However, it is very important to always write down your findings and analysis in easy to read points.

Remember, you are looking at the past performance of the small business you intend to buy

The numbers and details of the business that are available are based on the past performance. They will not guarantee anything in the future. The future can be better or worse than the existing performance and numbers. Therefore, you must do your own calculations and analysis as you cannot rely on a history that is provided to you.

Tax history

The Australian small business is required to operate under a government provided legal framework. Moreover, a small business Australia is also required to pay tax under the Australian law. The Australian Tax Officeprovides clear guidance to small business regarding different types of tax that are applicable on small business based on their structure and types of business. Organisations like The Quinn Group and etax local can help the potential buyer to understand the existing small business tax requirements.

What is the existing and the future value of the small business you intend to buy?

A potential buyer needs to quantify the existing and expected value of the small business he intends to buy. The proper due diligence will allow to drive a quantifiable financial value. With due diligence the buyer needs to consider Assets (including goodwill), liabilities, work in progress, commercial life of the business, cash flows, opportunity costs and other finance heads to derive a financial value of the small business for sale. Organisations like National Australia Bank (NAB)bizval and   Adroit Lawyers can assist the buyer and conduct due diligence of a small business for sale in Australia on their behalf.

Customer analysis

Besides financial analysis, it is very crucial to conduct an independent customer analysis. It has been noticed severally that in various cases, small business sales rely on one or two customers or on a very small base of customers and the customers have one to one relation with the small business owner. In such businesses, there is a high risk that the customers may stop using the product or service once the business will be sold to new owners, thus directly reducing the sales. Therefore, it is important to assess the existing customer base loyalty and engagement with the product and service the small business is offering.  Moreover, it is also important to analyse the consumer buying behaviour, changing needs and future demand for the product or service the existing small business offers.

Material documents

Before taking a final decision to buy an existing small business, a potential buyer must review all the material documents including the following:

  • Purchase or sale of assets
  • Supply or purchase agreements
  • Contracts and subcontracts
  • Any partnership or other agreements
  • Supplier and distribution agreement
  • Management agreement
  • Franchise agreement (if any)
  • Contracts with customers, government and other agencies
  • Financial contracts and charges
  • Claims and complaint documents
  • Tenders and any intellectual property like patents, trademarks and copyrights
  • Any other material documents

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