How to Make Sure You Are Buying a Healthy Business?

When you set out to make your way into the entrepreneurial world, you are filled with enthusiasm and determination. However, you soon realise that...

  • How to Make Sure You Are Buying a Healthy Business?
    Gemma Davis Image Gemma Davis

    How to Make Sure You Are Buying a Healthy Business?

    • Updated: Thursday 13th of August 2020
    • Strategy

    When you set out to make your way into the entrepreneurial world, you are filled with enthusiasm and determination. However, you soon realise that buying an existing business requires much more than grit and conviction. You need to be sure what you are getting into through careful analysis of the organisation rather than going by the face value of the venture. The foremost reason for buying a profitable business for sale in Australia is that you don’t have to build an entity from the ground.

    It provides you with an established infrastructure and positive cash flow to start generating a return on your investment from day one. Thus you need to be sure that you put your money into a venture that is aligned with your work experience and expertise. Keeping all the aspects of the business in mind will help you to evaluate its viability with efficiency. Here is how you can make sure that you purchase a healthy business.

    The Reason for Sale Should Be Justified

    Many sellers have genuine reasons for selling their businesses, such as chronic health issues, retirement age, relocation to another city, etc. Others sell their business because it has not been faring well or facing unprecedented challenges. However, many of them may not be willing to share this reason and may try to hide such problems to sell the company quickly. Thus as a prospective buyer, you must assess why the business is not performing as expected and how the problem can be resolved.

    You should analyse the measures employed by the current owner to get over the situation and whether you would be able to find better solutions. The weaknesses of the business could be shrouded in overwhelming debts, insufficient stock, steep competition, weak pricing, outdated technology, etc. You must be able to identify them and check the future capabilities of the venture. A SWOT analysis can help in ascertaining these elements precisely.

    Conduct Detailed Due Diligence of the Company

    Interested buyers may find an excellent opportunity and feel like going ahead with it on the basis of its look and feel. However, it will be a foolish decision to jump the bandwagon without investigating the company thoroughly. You must ask for disclosure documents from the seller that should contain vital information about the operational, financial and legal aspects.

    You can also speak to the stakeholders, suppliers, vendors and existing customers to understand the nature of relationships shared with the business. You must take a more in-depth look at the competition and how the entity is maintaining a competitive advantage in the market. Misrepresentation of the actual condition is one of the common mistakes made by the sellers.

    Thus there is a long list of items that must be reviewed by the buyer, such as contracts, leases, licenses, permits, inventory, equipment, debts, liabilities, assets, fixtures and agreements.

    Verifying the Financial Condition of the Entity

    It is the most significant step as it helps in assessing the financial condition of the business. You will need the help of a professional accountant or bookkeeper for correct appraisal. It allows the buyer to determine the business drivers which have been promoting growth and progress. The accountant will evaluate the financial documents and bank statements to check the accuracy.

    Financial due diligence aids in identifying the bottom-line of the entity from the days of its inception and gives a clear idea of its current health. It brings forth any discrepancies in the data and helps in examining the credibility of the projections and documents presented by the seller. It helps in comparing the forecasts and the actual performance of the business.

    The financials that should be carefully scrutinised include tax returns, business activity statements (BAS), balance sheets, sales figures, accounting records, audit reports, cash flow and profit and loss statements.

    Look For Sustainability Signs

    A thriving organisation will boast of streamlined business processes, a long-serving and satisfied workforce, growing profit margins and a loyal customer base. These are the key indicators of a healthy business which depict potential and scope for further growth and expansion. Also, companies which have their expenditures under control and follow the budget consistently are sustainable and reliable.

    Entities which are involved in gimmicks and spend relentlessly on marketing without thinking about the budget might not be able to survive in the long run. You must also look for customer reviews and ratings online and on social media platforms to gauge the customer sentiment about the business and its reputation. Make sure that you keep the technological advancements and market trends in mind while making the decision.

    Perform an Employee Audit

    It helps in finding workforce-related challenges in the organisation. Check the latest records of the employees and determine the key performers who are indispensable. These personnel should be retained by the new leader to get the required support for taking the business forward. They can effectively help in creating a roadmap and business plan for the next few years as they are well-versed with the working of the organisation.

    The employee audit helps in recognising the skills of the workers and their salaries and wages. Also, enquire about their feelings related to the change in management and whether they will be planning to leave or stay with the company after the acquisition. If you get a feeling that several members of the staff will be leaving, then make sure that you plan interviews for fresh recruitments and find replacements to avoid downtime.

    Carry Out Business Valuation

    The asking price is usually inflated by the seller and needs to be negotiated. However, before you reach that point, you need to evaluate the actual cost of the business. It determines the worth of the business in the current market scenario while assessing all the aspects of the organisation.

    The final price must include everything ranging from tangible and intangible assets to intellectual property. You should also be provided with the list of the suppliers, vendors, employees and customers. The goodwill of the business must be a part of the intangible assets.

    Your accountant and lawyer can help in making accurate calculations using a business valuation method. Once you have a figure in mind, then you can negotiate on the price and close the deal.

    Conclusion

    Whether you are a seasoned investor or a first-time buyer looking for business opportunities in Australia, make sure that you keep the points mentioned above in mind to acquire a healthy business. A cautious and meticulous approach will help you to find the best deal for the investment.

  • Author Info Gemma Davis

    Gemma Davis is a Business Strategist with over 20 years’ experience and a CPA qualification in finance, accounting and business. She has been a source of inspiration to budding entrepreneurs and has guided them to reach the next level in their business growth plans. With her experience and expertise, she can help you to choose the right path and overcome all the hurdles in your journey as an entrepreneur. Her affiliation with Business2sell is a matter of pride for us.