Purchasing an existing business has its benefits; while it has a proven track record, you are buying the physical assets and existing customers of this business. It is vital that you check the financials carefully with an advisor.
The advantages and disadvantages:
Buying an existing business can be less risky than starting from scratch, however you need to carefully consider and investigate the business to avoid financial turmoil.
You’re purchasing the owner’s assets, stock and customer loyalty, and you will find it easier to gain financial backing as an existing business has a track record. While reducing the risk of failure, the common issue is the departure of the current owner which may have a negative impact on the new business.
You need to consider:
- Keeping and paying existing staff entitlements such as long service leave payments
- If a bad image is placed on the current business, it can be hard to change
- The business can be overpriced and not easy to transfer to
- If the equipment or premises is dated or below standard
- If it is difficult to get the lease assigned with existing entitlements
Research your industry
If you’re not familiar with the industry you’re about to dive into, see our Researching your market to see if your business will perform in the current market conditions.
Seek professional advice
Purchasing a business is tricky and costly; by valuing your potential purchase with a financial advisor or accountant, you can eliminate risks like overpaying or purchasing a failing business. While the owner may set their price based on future projections, you need to make your own assessment with a professional in the Casey Cardinia area before letting go of any money.
Get detailed professional valuations of all assets and liabilities of the business you want to buy to reduce the risk of making a bad purchase.
An objective assessment of total worth will include a valuation of:
The reputation, viability and potential of a business represent goodwill. This should be assessed as part of the overall investment in a business that needs to be sufficiently profitable, to at least cover the capital repayments after tax, and provide a fair income for the new proprietor.
Tangible assets include buildings, land, equipment, stock, fixtures and fittings. They're usually valued with an estimation of how they've depreciated, or an estimation of their resale value. Intangible assets includes intellectual property and goodwill, such as a strong client list.
Work in progress
Work in progress represents existing contracts a purchaser will receive from buying the business.
Liabilities of the seller
A purchaser may have to take on responsibility for employee entitlements such as holiday and long service leave. These entitlements would have to be assessed and deducted from the purchase price. The liabilities of the seller are not normally calculated in a sale price and a purchaser would not normally take over debtors, creditors or liability for future orders.
For businesses costing under $350,000, a Vendor's Statement (or Section 52 Statement) must also be provided by a seller to a prospective buyer.
In buying a business, you need to make sure it will continue to make a profit by checking the following:
- Commercial life of the business
- The value of a business fluctuates throughout its commercial life. For instance, changes in the economy, the need to replace failing equipment, and cancelled contracts will all impact on the viability of the business and its ability to remain profitable. A business can't always be resold later for the same amount of money. For example, if you're running a corner store and a large supermarket chain opens down the road, this will devalue your business.
- Opportunity costs
- The cost of passing up the next best choice when making a decision to invest represents opportunity costs. This accounts for the purchaser missing the opportunity to get income from other possible investments, such as earning an income, or putting the money into a term deposit.
To find a professional, jump to our Find Support section for possible sources of financing and speak to your financiers on loan or investment options.
Changing operations or business relocation
If you need to change the operations for example, retail store to a cafe or if your business is relocating to another area, there are planning requirements that depend on zoning and overlays on the land. You can find free Property Planning Reports here or jump to Permits.
Seek Professional Advice
Make your own assessment with a professional in the Casey Cardinia area