Your Essential Guide to Buying a Business

by Vanessa Lovie 5th of July, 2022

Your Essential Guide to Buying a Business

Buying a business is an exciting endeavour, but before you run off to browse businesses for sale, it's important to understand the entire process. Bsale put together this buying a business guide to help you understand the process and what you can expect on your journey to becoming a business owner.

9 Steps to Buying a Business

1. Determine if Buying a Business is Right for You
2. Find Opportunities Available
3. Make Enquiries Online
4. Review the Information
5. Make an Offer
6. Perform Due Diligence
7. Enter Negotiations
8. Exchange Contracts
9. Succeed in Buying a Business

Buying a Business

1. Determine if Buying a Business is Right for You

Are you thinking about buying a business? There are so many opportunities available, the biggest question is.... what is the right choice for you?

A lot of people go into ownership thinking the only way to become successful and make a lot of money is to start from scratch. This isn't necessarily true, buying an established business has alot of advantages, such as;

Sales history
Client base
Team members
Systems and procedures
Suppliers, distributors etc.
Established products and services
Fit-outs and equipment
Lease agreements
Marketing Strategies
Projected sales and income
...and much more!

All of these elements you can acquire when buying a business. It is a lot faster than starting from scratch and you can continue to grow and expand the current operation. Buying a business that is well established will allow you to earn an income from day 1, as opposed to a start-up which can take months, even years to establish a decent income.

If you are confused about becoming an owner, don’t worry, we will take you through a series of questions you can ask yourself. At Bsale, we have put together a buying a business checklist to help you determine if you are ready.

Checklist - Is Buying a Business a good idea?
Print Checklist PDF - Buying a Business Checklist

How do you know if you are ready?

A. Experience

One of the biggest determining factors of whether an owner will be successful is their level of experience. Most owners will tell you that they are a ‘jack or jill of all trades’, meaning they wear multiple hats that help their organisation succeed.

Buying a business and becoming an owner means you need to understand all the aspects from the ground up. Say for instance you want to purchase a restaurant for sale, are you a chef or an entrepreneur? Do you understand how to cost the price of produce? Have you managed a team? Do you know what a BAS is? Have you marketed on social media before? Have you created a budget?

Owners are well versed in all aspects of their organisation, not just performing a specific task.

When you are buying a business everything will ultimately fall onto your shoulders, so you need to have a deep understanding of your skills and weaknesses.

Questions to ask yourself

What industry do you have experience in?

The more experience in an industry the better chance you have of successfully buying a business. It is a big learning curve entering a new industry. Consider training or working within a company before you transition to a new industry.

For example, if you are looking to buy a cafe, but have never made a cup of coffee, reach out to a local cafe and see if you can work a few days to gain some experience.
What are your strengths and weaknesses?

When buying a business you take on a multitude of roles and responsibilities. As the owner, you need to understand your skills and how they can help, and where your weaknesses may limit the growth of the organisation.

When looking at buying a business it's a good idea to review the number of employees and the skills they currently bring.

For example, if you are a chef looking at purchasing a restaurant. Your skills may be in cooking and preparing the menu, but you may not have the necessary skills required for tasks such as marketing, book-keeping, staff management etc. So when you are considering buying a business such as a restaurant, determine who will do these tasks. Is there a current team member capable or will you need to upskill or hire additional employees?

A major benefit of buying a business is the training included. The current owner has been running the organisation for many years and can share their knowledge and experience. Most business sales include training for 2-4 weeks. This will help you transition into ownership by meeting key personnel and understanding the day-to-day operations.

B. Finances

In terms of finance, this can be evaluated in two ways.

Firstly, how much money do you want to earn?

If you are currently earning $1,500 a week how much do you need to invest into buying a business to see this level of weekly income? You may be looking at buying a business around $150,000+ to be on the same level.

Secondly, how will you finance the purchase?

Buying a business will cost you money. You need to evaluate how much capital you will need when buying a business. Whilst loans may be difficult to determine until you have selected the opportunity you wish to buy, lenders will often request some collateral for a business loan. You will need to determine how much you may need, and how you will obtain the finance.

Remember, you will also need to recover the capital you initially invested into buying the business. It's important to evaluate the ROI when buying a business.

C. Commitment

Are you ready? Buying a business may lock you onto that path for a number of years. When you transition into ownership it will take a lot of passion and determination to make it successful and continue to grow.

You need to ask yourself,

What are you passionate about?
Do you have the drive to face the challenges?
Does being an owner excite you?
Can you commit for the next few years?

It is the passion and commitment that makes owners get up every day and take on the joys and challenges of running an organisation, you need to make sure you are ready for buying a business.

If this is your first time buying a business, surround yourself with other owners, join groups, be educated and enjoy the journey.

Buying a Business takes Time

2. Find Opportunities Available

Now that you have an understanding of what you are looking for, you can start looking at buying a business.

There are 5 major business for sale websites in Australia including Bsale.com.au. Every website has different content based on its clientele and whether they cater to owners, franchises, boutique brokerage or large multinational groups.

You can commence your search for buying a business by categories or keywords. Saving your searches and adding listings to your favourites will make it easier to track opportunities.

Buying a business is best done on websites that are dedicated to opportunities advertised by owners, brokers and franchise groups. Why? Sellers tend to be more genuine and the opportunities are of higher quality. When you start looking at buying a business you may not be able to discern a good from bad opportunity. You want to make sure you are investigating opportunities that can enable you to be successful in your ownership journey.

Buying a business is possible in every state of Australia including capital cities; Sydney, Melbourne, Brisbane, Perth, Adelaide, Darwin, Hobart and Canberra.

You may want to start your search with major categories such as Cafes, Restaurants, Beauty Salons or Supermarkets.

Once you have found an opportunity you may content the seller.

Buying a Business can be done on Bsale

3. Make Enquiries

Once you have started searching for buying a business you will want to favourite them and make contact with the seller. You can make an enquiry online or via phone.

We have put together a list of 3 questions you can ask a potential seller, which will help you get a better understanding when buying a business. It is a good starting place before progressing.

Can I please get a copy of the Memorandum?
What are the lease terms and agreements?
How many hours a week does the owner currently work?

Expect to receive an NDA

Once you receive a reply from the seller, they will probably request that you complete a Non-Disclosure Deed or a Confidentiality Agreement when buying a business. This is to protect the privacy of the organisation. After you have signed and returned this document they may provide you with additional information such as a Memorandum or a Profit and Loss statement.

Buying a Business Review the Information

4. Review the Information

Once you have received more details about the business you are interested in buying, you will want to commence your investigations. Typically, the seller will only provide limited information at this point. This is to ensure that confidential information during the buying a business process is protected, as there may be multiple potential buyers.

At this stage, you will need to decide if buying this business is the one you would like to pursue. You should organise with the owner or broker to visit the workplace. This will allow you to get a better understanding of how the organisation operates.

Whilst it may be difficult to make a decision at this stage, due to limited information. There is a period called, due diligence, that a buyer can enter that allows them to further investigate when buying a business. This process is usually only available after a deposit is made.

It’s important to remember, when buying a business you are not the only person looking. The reason information is protected is so competitors and other people who wish to copy important information are prevented from accessing it. So whilst it may seem annoying, it is there to protect the current and future owners.

Buying a Business Requires Due Dilligence

5. Make an Offer

After reviewing the opportunity when buying a business, if you still wish to proceed you will need to make an offer, and if accepted, a deposit.

There is no standard value for the deposit it is usually around 10% of the purchase price. But this is usually set between the seller and buyer. The deposit is usually held by the sellers’ agent or solicitors in a trust account.

When you make a deposit you need to ensure a receipt is issued and there are written terms for what happens next. Terms may include;

What happens to the deposit if the buyer doesn’t proceed with the sale?
How many days are there to perform due diligence?
How many days are there to negotiate on the sale?
Who can the information be shared with?

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Obtain Professional Advice When Buying a Business

6. Perform Due Dillgence

Typically, due diligence is performed after a deposit is received. It may vary depending on how you are buying a business. So it’s best when making an enquiry to ask the seller their preferred process.

Due diligence is the process where a buyer gets to investigate buying a business in full depth, this includes:

Financial
Profit and loss, balance sheets, salaries and wages, superannuation, tax obligations, net profit to the owner etc.
Operational
Customers, stock, website, marketing channels, suppliers, inventory, social media presence, employees, procedures, products and services, commercial premises lease, plant and equipment leases and ownership. etc.
Legal
Organisation legal name and registrations, trademarks, patents, ATO liabilities, outstanding claims and court cases, legal matters, product warranties, service agreements, contracts, employee contracts, domain registrations, distribution contracts etc

There are a number of documents that can be reviewed when buying a business, we have put together a due diligence checklist to help you establish what areas you should be assessing.

Due Diligence Checklist When Buying a Business
Print PDF Checklist - Due Diligence When Buying a Business

It’s very important a buyer obtains assistance from professionals such as accountants, solicitors, brokers and advisors. Whilst a buyer may get caught up in the romance of buying a business, independent professionals will be able to assess the opportunity and give a clear picture of the risks, potential and whether the asking price is reasonable.

Negotiations on Buying a Business

7. Enter Negotiations

When buying a business you’ll most likely want to negotiate on what is included in the sale. Often solicitors and brokers like to use a ‘Head of Agreement (HOA)’ which is usually a non-binding agreement used prior to drafting a contract of sale. It's important you understand this document and the potential risks associated with it.

The HOA can help establish things such as;

The intent of each party including their background.
Terms of the sale and inclusions such as; inventory, training, plant and equipment.
Lease details and transferability
Pricing negotiations
What information is private and confidential
Conditions that must be met before settlement can occur.
Specific clauses such as a ‘non-compete' or ‘buy-out’ agreement.

This is why it is important to get professional advice when buying a business so they can help guide the sale.

Exchanging Contracts during the Buying a Business Process

8. Exchange Contracts

Once the buyer and seller have negotiated the terms during buying a business a contract of sale is created by the seller’s solicitors. This is then sent to the buyer’s solicitor, once signed and exchanged the contract is now legally binding.

As discussed during the negotiation phases there are a number of requirements from each party that must be completed whilst buying a business and before the settlement date.

For the buyer this usually includes:

Processing payments
Attending training

The seller has a number of obligations that can be found in Bsale's selling a business guide.

Successful in Buying a Business

9. Succeed in Buying a Business!

Now that you have arrived at the settlement date, you are successful in buying a business. Congratulations!

Hopefully, during the settlement period, everything went smoothly with obtaining your finance, undergoing any training and transitioning into the organisation.

If you are a first-time buyer, it must be very exciting and you will have a number of plans and ideas for your journey ahead.

Print PDF - 9 Steps to Buying a Business Checklist

Disclaimer: This information is a guide only and not to be considered professional advice. Always consult with a licensed professional when buying a business.