5 Things to Watch Out For When Buying a Business in Australia: A Business Broker Explains.
Buying a business for sale in Victoria, Australia, can be an exciting and financially rewarding investment. However, before making such a major financial decision, one must always look past the surface and ensure that there are no unwanted surprises that can turn your investment into a costly mistake. At an experienced business brokerage, we at Bendigo Business Sales know a thing or two about buying and selling businesses. In this post, we’ll take a look at the 5 most important things to watch out for when buying a business in Australia.
What are the advantages and disadvantages of buying an existing business?
Regardless of the industry or scale, purchasing an already established business can offer significant benefits compared to starting one from scratch. At the same time, you will need to be mindful of the potential disadvantages that come with such an acquisition.
Advantages
- Established systems complete with suppliers, processes, and an experienced staff
- The existence of an established base of customers and brand recognition
- Having access to historic performance data, which can be leveraged to convince lenders to help finance the acquisition
- Having access to immediate cash flow to help with financing and reinvestment
Disadvantages
- The inheritance of a potentially bad reputation
- The inheritance of hidden financial and legal complications involving debts and compliance
- Outdated systems and processes
- The existence of unfamiliar staff and work culture
What are the things to watch out for when buying a business in Australia?
If you’re considering the purchase of a business, you will need to know what you are getting yourself into. To do so, you must conduct due diligence on the business beforehand, and said due diligence should primarily focus on uncovering the following:
- Financial Red Flags
- Legal Ownership and Structure
- Contracts, Licenses, Permits, and Compliance
- Employee and Workplace Matters
- Reasons for the Sale
Financial red flags
If the company being sold is inconsistent with bookkeeping, has a decline in revenue and profits, and has engaged in unusual cash transactions, there is a possibility of financial mismanagement and the existence of hidden debts and liabilities such as taxes, invoices, and employee dues.
Thoroughly go through the company’s financial records with the help of an accountant and get answers in writing for questions about any inconsistencies. It will allow you to protect your interests should complications arise in the future.
Legal ownership and structure
Another aspect of due diligence is whether the company is compliant with all its legal obligations. The ownership arrangement of the company (sole ownership or partnership), registration in the Australian Business Registry, the existence of trademarks and other intellectual property, as well as any ongoing legal battles, must all be identified in the due diligence.
This will help ensure that there are no conflicting ownership claims and that you have the exclusive rights to use the name and intellectual property following the transfer of ownership.
Contracts, Licenses, Permits, and Compliance
When you purchase an established business, you are bound by existing contracts, licenses, and permits. We recommend that you acquire the assistance of an experienced attorney and go through the contracts and determine whether they are indeed fair and competitive. Once a determination is made, you can either choose to renegotiate the terms or end relations with the other party when the contract period expires.
At the same time, you will need to look inwards at the company’s operations to see whether they comply with industry standards. If the company is in compliance or is in the process of achieving compliance, the risks associated with ownership are significantly reduced. However, if the company is not compliant, they and you as the owner can be subject to fines and other penalties.
Employee and Workplace Matters
A company’s employees are its backbone. It costs much less to retain and promote existing employees than to train and hire new ones. Therefore, you will need to take a closer look at current workplace dynamics and consider whether they are in line with your management philosophy and whether there could be potential friction following the change in ownership.
Reasons for the Sale
Arguably, one of the most important questions that needs to be answered in the due diligence process is, why is the owner looking to sell their business? There can be a multitude of genuine reasons that prompt a sale, such as retirement or moving to a different area. At the same time, there can be far more nefarious reasons, such as attempting to pass on legal obligations and volatility in the industry. By understanding the reasons for the sale, you can gain a better understanding of whether the business is worth acquiring, ensuring both your financial and legal security.
Conclusion
Buying a business is a major financial decision that can set you on the path to long-term financial success. At the same time, it is a double-edged sword, which can also become a significant financial burden if you are not careful.
Therefore, conducting due diligence and uncovering everything there is to know about the business is absolutely essential. This is where a trusted business brokerage like Bendigo Business Sales comes into play. For over 30 years, we’ve been helping seasoned entrepreneurs and first-time buyers navigate the complexities of the markets and finalize their purchases, and we would love to help you do the same. Get in touch with us to make your dream of owning a business into a reality.
