Buying an existing business

Step 1: Are you ready?

business.gov.au suggests checking whether you’re ready before you look:

• Do you have the skills to run this type of business, or a plan to get them?
• How much time will it need, and are you ready for unusual hours and pressure?
• What are your personal goals, and will this business help you reach them?
• Do you have the money to buy it, and to keep it running while you settle in?

Buying an established business has advantages: a customer base, staff, systems and income, and established businesses can find it easier to get finance. But you may also inherit outstanding contracts, debts or a poor reputation.

Step 2: Find the right business

• Look in an industry you know, or are prepared to learn deeply.
• Search business-for-sale listings, business brokers, industry contacts and your network.
• Ask: does it have real potential? What can you bring to it? Is the location right? Does it have an established customer base?

Be wary of businesses that rely heavily on the current owner’s personal relationships or skills. That value may leave with them.

Step 3: Research the business

• Understand the market: customers, competitors, trends and threats. See Market research on a budget.
• Talk to people: business.gov.au suggests talking to customers, employees and neighbouring business owners where you can, to get a sense of how the business is going.
• Check its reputation: reviews, social media and anything published about it.
• Visit at different times to see how busy it really is.

Step 4: Value the business

Don’t rely only on the asking price. business.gov.au suggests working out the current value and growth potential, and considering a professional valuation of the business’s assets and liabilities.

Common approaches look at:

• Earnings: what the business reliably earns, after adjusting for the owner’s pay and one-off items
• Assets: equipment, stock and other assets, less liabilities
• Comparable sales: what similar businesses have sold for.

Value depends heavily on how reliable and transferable the earnings are: recurring customers, contracts that transfer, good staff and systems, and low dependence on the owner all matter. An accountant or business valuer can help.

Step 5: Due diligence

Gather as much information as you can before you sign, and get an accountant and lawyer to help review it. business.gov.au lists items to check, including:

Financial

• Financial statements, tax returns and BAS records for several years
• Management accounts, sales by customer and product, and margins
• Debts, liabilities and any amounts owed to suppliers or the ATO
• Cash flow, and how quickly customers pay

Legal and operational

• Licences and permits: are they current, and can they transfer to you?
• Contracts and leases: will the landlord transfer the lease, or will you need a new one?
• Agreements with suppliers and customers, and whether they can be assigned
• Plant, equipment and fixtures: condition, ownership and any finance owing
• Stock: quantity, condition and value
• Intellectual property: business name, trade marks, website, domain and social accounts
• Staff: who’s staying, their roles and their entitlements. Get advice on your obligations.
• Warranties and refunds the business has promised customers
• Disputes, claims or compliance issues

Check the business’s own payment practices too. If its major customers are large businesses, the Payment Times Reporting Scheme register shows how quickly they pay small suppliers.

Step 6: Make an offer and negotiate

• Base your offer on your valuation and due diligence, not the asking price.
• Make the contract conditional where possible, for example on finance, a satisfactory lease transfer and completion of due diligence.
• Negotiate a handover period, with the seller helping to introduce you to customers, suppliers and staff.
• Consider a restraint stopping the seller from opening a competing business nearby for a period.
• Agree what’s included: stock, equipment, intellectual property, customer lists, and how stock is valued at settlement.

Have a lawyer prepare or review the contract. See Contracts and legal basics.

Step 7: Funding and structure

Work out how you’ll pay, including working capital for the first months, and what business structure you’ll buy through. Talk to your accountant before you sign, as the structure affects tax, liability and future sale. See Funding a start-up and Sole trader, partnership, company or trust?.

Step 8: Settlement and handover

• Update registrations: ABN, business name, licences and permits.
• Transfer accounts: bank, utilities, insurance, software, domain and website.
• Meet staff, customers and suppliers early, ideally with the seller.
• Keep what works for the first few months, and change things gradually.
• Change passwords and access for every system.

Considering a franchise instead? See Buying a franchise.