Preparing to buy a business

Once you have decided you're ready to buy a business and have checked advertisements of businesses for sale, you will have a shortlist of potential businesses to suit your budget, interests and goals. The next step is to prepare thoroughly by seeking professional advice, getting your finances in order and starting to research the businesses in more detail.

Organising your business advisers

Getting sound professional advice is a vital part of the due diligence process. At a minimum, you will need the services of an accountant (to investigate the financial data and operations) and a solicitor (to investigate any regulatory issues, check licences and registrations and draft a purchase agreement).

Checking your finances

Buying a business is a significant investment, so you need to sort out your finances early and be well prepared and professional when applying for a bank loan or approaching potential investors. This will give them confidence to back your business and convince the seller you are serious.

When checking your finances, consider:

  • the purchase price of the business
  • transfer (stamp) duty, usually payable by the purchaser
  • the working capital requirements for your business (your cash flow projections will show that figure)
  • professional fees and charges related to the purchase
  • any loan repayments and servicing costs, if applicable.

All commercial lenders use the following criteria to assess loan applications:

  • your ability to service loans (interest and periodic repayments)
  • security (most banks require a 1st mortgage on real estate security and may lend up to 65% of the real estate asset being offered as security)
  • the management and business skills of the borrower
  • the trading history of the business (at least 3 years prior to purchase)
  • the profit and loss and cash flow forecasts for 3 years (forecasts need to be supported by realistic assumptions about future trading).

It is important that you are able to supply the necessary information to the lender assessing your request.

Remember, every funding proposal will have its own unique features. Therefore, you should seek professional advice from your accountant or business adviser about the best way to organise funding.

Starting your research

Early research of potential businesses could include:

  • scouting the location
  • researching and profiling your competition (what do they offer that is different)
  • checking the business's website and marketing materials
  • trying the business's products or services
  • checking demographics
  • finding out why the business is for sale
  • talking to the business's suppliers
  • talking to the business's customers
  • researching customer reviews about the business online
  • performing a credit and historical search on the business's legal structure and/or its owners/directors
  • researching industry and market trends.

Also consider...