What to check before buying a business

Buying an operating business may give you customers, systems and premises from day one. You can also inherit a business that relies on the current owner, one customer or a lease that cannot be transferred. Ask for evidence before treating the advertised profit as your future income.

First, define what you would receive

Is the offer for assets, a company, stock, a trading name, contracts or some combination? List equipment, intellectual property, website, customer records, lease and licences separately. Do not assume a contract or licence automatically moves to you. A lawyer can explain the proposed transaction and what consent may be needed.

Check the earnings story

Ask for profit and loss statements, balance sheets, BAS, bank records, customer sales and cash-flow information. Compare the records for the same periods. If a café reports $450,000 annual sales but bank deposits and tax records tell a different story, ask why. A valid explanation may exist, but you need to understand it before pricing the business.

Also ask what work the owner does. If they work 50 hours a week without a market wage in the accounts, the reported profit may fall when you hire someone to replace them. Use the profit and loss lesson and balance sheet lesson to understand the statements, then have an accountant review the actual records.

Look for dependence and hidden commitments

Which customers produce most revenue? Can they leave at short notice? Are key suppliers, staff and licences likely to remain? Check equipment condition, stock quality, lease renewal, customer deposits, disputes and debts. For example, if one contractor produces 40% of a workshop’s jobs and plans to leave, past sales may be a poor guide to next year’s result.

Work through the business purchase due diligence checklist and write down every claim you have not verified. Prepare a cash-flow forecast for the first months after handover, including stock, wages, tax and transition costs. Finance may become relevant once the price, obligations and cash need are clear; it should not replace due diligence.

Important things to know

• An asking price or valuation is not proof of future earnings.
• Asset and company purchases can transfer different rights and obligations. Get legal and tax advice for the proposed structure.
• Check documents before a binding commitment, and have an accountant and lawyer review significant unresolved issues.