The Complete Guide to Buying a Business in Australia

Updated on 30/10/2024

Buying an existing business is a great option for people looking to break into an industry and ambitious small business owners looking to expand their operations. But knowing how to conduct due diligence before signing on the dotted line is essential.

Buying a Business for Long Term Success

In recent years, the likelihood of new businesses in Australia failing has reached a 15-year high. In contrast, businesses that are purchased with an established operational history, customer base, and branding tend to have a significantly higher success rate.

An established business comes with existing equipment, staff, and customers – all of which take time and resources to build from scratch. But you’ll also inherit any existing issues the business is facing.

That’s why it’s essential to carry out your due diligence and be honest about your capabilities to make the business a success and ensure it is the right business for you.

To help you navigate the process, we’ve created this guide to walk you through buying a business in Australia, and how you can access the funding you need.

What Is the Best Type of Business to Buy?

You should look for a business in an industry you are passionate about and that is a good fit for your skills and experience. Be honest with your assessment. If you have zero background in an industry, consider getting some experience before buying a business.

However, if you have previously worked in hospitality, that doesn’t mean you can’t make a success of a wholesale business. But it does mean you might need help with logistics, sales, and other areas of the company.

Additionally, it might be worth reaching out to a business broker. Brokers have access to a wider network of potential sellers and will help you connect to various opportunities.

Understand the Industry

If you are unfamiliar with the industry, you’ll need to conduct in-depth research to ensure you have a thorough understanding of how the business works and makes a profit.

Look at successful businesses in the industry. What are they doing to thrive?

Depending on the industry, you may want to investigate international competitors. Are there any new products or services being developed overseas that could impact the domestic market and affect profitability?

The Motivations Behind a Sale

It’s vital to know the motivations behind a business owner’s decision to sell. This will help you secure the best deal possible and avoid buying a failing business.

If a business owner is selling to clear a debt, that’s usually a red flag. If the debt is secured against the existing business, why has the owner struggled to pay back the sum owed?

The best-case scenario is that the owner is looking to retire or sell for personal reasons unrelated to the business. The current generational shift in Australia is presenting a unique opportunity for potential buyers.

The average age of small business owners in Australia is rapidly getting older, with the most common age of small business owners across the country being 50 years. Back in 2006, this was 45 years old.

As this generation of business owners reaches retirement, there’s an excellent opportunity to buy a well-established and profitable business.

How to Assess an Existing Business

Once you have reached an agreement in principle, you will be allowed access to the business’s files to determine whether you want to proceed with the purchase. This is a critical step in finding the right business to acquire.

Financials

There are several key financial documents you’ll want to examine:

Balance Sheet

The current balance of the business’s finances.

Profit and Loss Statement

A detailed view of the business’s performance over time.

Cash Flow Statement

An overview of the business’s income and expenditure.

You should enlist professional experts to help you examine the business’s financial documents. A range of professional opinions can help you to identify any concerns or financial irregularities (such as outstanding contracts) that could impact the business’s long-term success.

Legal

A legal review will reveal any issues related to partnerships, contracts, and liabilities. This covers how the business is incorporated and any regulatory obligations.

The legal review should also investigate any litigation where the business or the owners were plaintiffs or defendants.

Customers

Customers will be your source of revenue once you take over the business. You should examine any major customers, identifying the percentage of revenue they contribute, their importance to the profitability of the business, and what they have purchased.

You’ll also want to determine whether the customer is loyal to the business or if they have a relationship with the current owner.

Assets 

Assets are the most significant contributor to the valuation of the business. They also have a considerable impact on the smooth transition of ownership and the amount of capital you will need to maintain operations.

For example, a food delivery service relies on vehicles to generate revenue, while a retail store depends on its IT system and customer database.

You also need to establish whether all of the business assets will be included in the sale.

If the business owns equipment or machinery, Asset Finance can be leveraged to secure funding for the purchase, or as an additional source of finance once you have taken ownership. That’s why it is important you have awareness and understanding of all the assets of a business in consideration.

Employees

Maintaining existing staff is the easiest way to ensure that operations run smoothly after the sale.

On average, it takes Australian companies 28 days to fill a vacant position – the loss of productivity, recruitment process, and onboarding results in an average cost of $26,000 per new employee.

If possible, you want to retain the existing employees (or at least the key employees) to help you run the business.

Valuing the Business

Once you have assessed the business, you will need to conduct a valuation to determine if the asking purchase price is reasonable. If you would like to ensure you cover all aspects of your due diligence, you can enlist a professional valuer or financial advisor to conduct a formal valuation. The valuer will conduct an industry benchmark for the business, assess future profits, and evaluate assets, including intangible assets.

There are three standard valuation models to help you determine a fair purchase price when looking to buy an existing business:

Market-Based

This valuation is based on the sale price of similar businesses and the average industry valuation for a business of the same size and turnover.

Asset-Based

This approach utilises the net assets of the company and subtracts the value of the liabilities. The valuation is the figure left after the market value of the assets and liabilities has been calculated.

Income-Based

An income-based valuation looks at the business’s cash flow and the expected profit the business will generate over time. These future economic benefits are discounted to provide a present valuation.

Financing the Business Purchase

Before you can negotiate a price with the business owner, you should look into how you will fund the purchase. There are several options, with the most suitable finance depending on your circumstances.

Asset Finance  

Asset Finance allows businesses to leverage their existing assets to secure funding for new business purchases. This type of financing is particularly useful for acquiring equipment, machinery, or vehicles without needing a large amount of upfront capital. Payments can be spread over time, helping to maintain cash flow and operational flexibility.

Invoice Finance

Invoice Finance, on the other hand, provides immediate cash flow by allowing businesses to borrow against their unpaid invoices. This method is particularly beneficial for companies with significant outstanding receivables. It can support ongoing operational costs and growth initiatives. Explore the benefits Invoice Finance can offer your small business by clicking here.

Secured Loans

Secured loans involve borrowing against personal or business assets, which serve as collateral. This type of finance solution typically offers lower interest rates compared to unsecured loans because the lender’s risk is lower. To find out more about how business loan repayments work, read our guide here.

Unsecured Loans

Unsecured loans do not require collateral, which makes them a more accessible option for many business owners looking to finance a new company purchase. However, unsecured loans often come with higher interest rates due to the increased risk for lenders. You can learn more about unsecured loans and how they work here.

If you already own a business, you can use your existing assets to fund the purchase of a new business. These assets can include outstanding invoices, debtor ledgers, equipment, and machinery.

ScotPac can help you leverage your existing assets and the assets of the business you want to purchase to access the finance to fund your business acquisition.

Make an Offer

Before you enter into negotiations, make a list of the business assets and place them into two categories: non-negotiables and nice-to-haves. You should also set a limit of the highest price you are willing to pay.

Give yourself some room to increase your offer by starting negotiations at the lowest justifiable price. It’s always a good strategy to begin with a low offer and improve it if necessary.

If you agree on a price, arrange for a purchase contract to be drawn up, but be prepared to walk away from negotiations if the asking price is unreasonable.

Purchase Contract 

Once you’ve agreed on a price, the next step is to draw up a purchase contract. This legally binding document ensures that you and the seller understand the terms of the sale.

This is the point at which you should conduct comprehensive legal due diligence. A lawyer will be able to help you draw up the purchase contract. The document should list all of the assets to be included in the sale, including both hard and soft assets of the business.

The document should also include contingencies for any unexpected issues caused by inaccurate or misleading information provided by the seller (e.g. if the business has more liabilities than the seller revealed at the point of sale). These contingencies will help to minimise the risk you take on when you purchase the business.

As part of your financial due diligence, it’s also recommended that you enlist the help of an accountant to understand the tax implications before you sign off on the purchase.

If everything goes through as planned, the seller will agree to the terms of the sale, and you’ll be the new owner of an existing business!

Contact ScotPac to find out more about how to buy an existing business

Whether you’re looking for more information regarding any of the items above or wanting to secure funding to help you buy an existing business, the team at ScotPac is here to help.

With a broad range of flexible financial solutions available, our lending specialists can tailor the right funding option for your business needs. Contact us today for a free, no-obligation initial consultation and discover how ScotPac can help you.