Western Australia - Buying A Business

Article by: Jay
Last updated: Tuesday, 11-Jul-2006 00:00:00 CEST

So you want to buy or are buying a business in Australia!

Or, you may need to buy a business in order to meet your visa criteria. The more risky option is to start a business. This appears illogical when you consider that you could buy an existing business with established cash flows, existing customers and suppliers and motivated employees, which is already operating in the local market. For these reasons, banks are often more prepared to lend for the purchase of an existing business. However, it can be a complicated and time-consuming process that is fraught with danger and one you need to be prepared for and be aware of.

Overview Of the Buying Process

The process of buying a business usually takes the following course and each step has its own potential mishaps and pitfalls.

Evaluating a business

One of the most important steps taken towards buying a business is making a sound judgment on the viability and true worth of the potential purchase. In order to properly evaluate a business, you will need access to certain information about that business and also know what to ask for and how to analyse the information you receive.

Negotiation When Buying

Price is just one aspect of the transaction to be negotiated. The terms and conditions attached to and forming part of the sale agreement are equally important to the price. For instance, a restrictive covenant which prevents the vendor from starting another business in the same industry within an agreed time frame and within an agreed distance from the business s/he is selling.

Valuation

The worth of any business can be measured objectively. This includes price earnings ratio (P/E), return on investment (ROI), discounted cash flow valuations and asset valuations. However, valuations and an offer to purchase are usually determined subjectively. The subjectivity takes into account how much you are prepared to pay, the skills you possess, what you believe you can do with the business, its location, the financial structure of the deal, how well you think you can work with the vendors, how you "feel" about the business etc. etc. etc.

Heads of Agreement or Heads of Terms

This document is created to set out the main terms of the sale. It enables you to detail the agreement in principle, prior to other parts of the buying process taking place such as due diligence and the production of documentation. Consider very carefully what should be included in this first document.

Due diligence

this is a process of finding out whether what you have been told about the business is true or within the bounds of reasonableness. For instance, the profits created, the cash generated and whether long service leave is a condition of employment for the workforce and what amount is outstanding as a liability.

Sale & Buying Purchase Agreement

You’ve satisfied yourself that buying this business is right for you, and that you can adequately and suitably finance the purchase. You have agreed terms and conditions with the vendor. Now the deal needs to be documented in a Sale & Purchase Agreement, based on the Heads of Terms agreed earlier in the process. This is the most important document in the whole transaction, so make sure you know what should be included and make sure the document reflects the items actually agreed and the spirit of the agreement.

Completing the buying transaction

Once everything is signed up and the transaction is complete, make sure that the conditions on the transaction - both the ones you are responsible for and the ones the vendor is responsible for - are met as they should be. At this stage, you need to be totally and utterley conversant and knowledgeable about what is contained and meant by each condition in the sale and purchase document.

Post buying completion

From the moment you have bought the business you have to run it as the new owner! At this point you will feel both elated and extremley tired. You will need to work very hard with the previous owner(s) to ensure a smooth and successful transition for everyone involved. This includes the workforce, customers, suppliers, the previous owner(s) and your financial backer(s) - even if this is only you!

Summary

As you can see buying a business is not an easy thing to do and involves many, many factors to be taken into consideration and then actioned before the actual buying process takes place. Once complete you will then be able to reep the benefits of owning and running your own business has to offere - good luck!