While many people use RAC or NRMA to conduct a vehicle inspection before they buy a second-hand car the same due diligence process should be undertaken when buying a business to ensure the asking price is fair and reasonable and to avoid buying a dud. The due diligence includes getting a business’s valuation and a detailed review of the business operations, industry, reputation and analysis of financial performance.

The onus is on the buyer to conduct proper due diligence and not rely on gut feel which may prove costly in the end by buying a dud business or agreeing to a price which is overpriced. Buying a business is a large investment so you must verify that the business will be able to generate the income and returns you require to meet your lifestyle and any loan/finance obligations you may need to meet.

Here is a summary of the key activities buyers may undertake during the buying process.

1. Get a qualified business valuation

While many buyers try to save money and avoid getting their own independent valuation done before buying a business it could proof costly and result in buyer paying thousands $$$ dollars more than they need to. A business valuation can also assist a buyer in obtaining finance as banks will seek evidence and support for application. The business valuations we prepare are bank approved.

2. Assess the market

Before buying a business, you should assess the market and industry in which the business operates. Determine if the industry has forecast growth over the next 5-10 years, if they are a forecast decline than you may choose to avoid purchasing business altogether or offer considerably less than seller asking price.

3. Does the business have current business plans?

A business with a plan and forecast of growth will be more attractive than a business with no direction and no opportunity for growth. Opportunity for growth will inspire buyers of the possibilities’ and opportunities to grow the business and generate a profit when they sell in the future.

4. Business Operations

Does the business have systems and well documented policies and procedures, if it does the handover will be less stressful and disruption to business kept to a minimal as new owner will have the guidelines to ensure the smooth running of operations. Businesses’ which have poor documented procedure’s and are heavily reliant on the owner operator should be viewed with caution and higher risk.

5. Sales/Revenue

Identify the major customers who generate revenue for the business and assess any that are of risk of leaving with new ownership. Assess if any new competitors are entering the market or opening new premises nearby which would significantly impact sales. Finally review all customer contracts and identify customers that are approaching end of contract.

6. Business Premises

Ensure your premises lease is up to date with options signed and in place and that the premises lease can be assigned to you without any complications – ask a lawyer if you are unsure.

7. Equipment

Check business plant & equipment to identify any major repairs or replacements needed in the short term this will identify if you can cope with any cash outlaws that may be required after purchase.

8. Staff

Identity any critical staff that plan to leave or stay on, ensure all contracts are up to date and job description current. Also check LSL & AL entitlements to identify any substantial amounts owed to employees.

9. Suppliers

Verify if supplier contracts are in place and assess if any are a risk of putting prices up or stopping supply.

10. Legal

Check and verify that the business doesn’t have any outstanding legal issues which may compromise business operations and future trading and viability.

11. Financial records and statement’s

Ensure all paperwork and record keeping is up to date, that there are no issues outstanding with ATO and all returns have been lodged. Get an accountant to audit or review financial records to validate accuracy and completeness of numbers, profits and revenue.

12. Cashflow

Check the cash position of the business, cash is the most important indicator of the health of the business. If the business has been continuously supported by the seller with injections of funds than the buyer should be wary. A business with cash positive position is normally an indicator of low costs structure and strong inflows of cash will be an indicator of a strong market position.

Finally consults professional to assist you in this process, don’t try and save money and undertake this process yourself. The money you save on fees may cost you a lot more if you end buying the wrong business or paying too much.