10 questions first-time business buyers should ask themselves

In the financial crisis, many employees being made redundant are using their leaving packages to fund business purchases, with little business experience. There are ten questions every business buyer must ask themselves before jumping in.

Cashflow | Starting

By Caroline Baker

One of the interesting side effects of the financial crisis has been that many employees being made redundant are using their redundancy packages to fund business purchases. However, they often have little or no experience when it comes to buying and running a business. There are ten questions every business buyer must ask themselves before jumping in.

While, it’s reassuring to see that more Australian’s are using their entrepreneurial skills to try and make money in these interesting economic times, a lot of people go into a business with little experience or knowledge of a basic preliminary checklist.

Everyone should be aware of the steps they should take and the knowledge they should acquire before taking on such an enormous responsibility. Every new business buyer, and in some cases even the more experienced should be asking themselves 10 basic questions whilst going through the process of purchasing a business. They are as follows:

1. Exercise due diligence in all your dealings

Exercising due diligence is the single most important step someone can take to make a fully informed decision when buying a business.

For first time buyers, purchasing a business is a significant decision, so you should be examining and re-examining everything that you’re doing to make sure you’re not setting yourself up for a fall.

Purchasing and running a business is a lot of hard work, so being thorough every step of the way will only further increase your chances of success.

2. Are you up to the task?

Buying and operating a business is not for the faint of heart. Whilst for some the idea of operating their own business spells freedom and more time with the family, and in some cases more money, this is certainly not true in all cases.

An evaluation of your personal and professional goals and capabilities is the first step to deciding whether or not you’re going to be able to hold up a business on your own.

Certainly tenacity and initiative are vital if you’re going to purchase and run your own business. You have to be prepared to take the victories with the defeats, as the buck now stops with you.

A deciding factor in the success of your business will be the way in which you handle the defeats and feed off the victories, and you have to be ready to put in long hours in order to be able to do this.

3. What type of business will you buy?

You need to consider what type of business it is you want to buy, and why. Perhaps the business will be involved in a field that you’re interested in or have some prior experience in, however these are not the essential factors in determining what kind of business you take up and run.

Whilst experience and interest in your business’s field will certainly help you in running it, the most important thing one can do is to properly evaluate the appropriate industry. Thorough research will give you a good idea of whether or not you will be capable of successfully running the business, and as such is a vital pre-purchase step to take.

As well as this, don’t be afraid to ask questions of others from the same industry – they will be able to give you an insight into the industry and any possible pitfalls that you may face.

4. What kind of business structure will suit you?

Before purchasing a business, it is incumbent on you to know the possible risks and opportunities associated with different business structures.

The way in which your business is structured, or the way in which you plan to restructure it, will have a marked effect on the way in which you do business.

Whether you’re going to be operating as a sole trader, a partnership, a company or some other arrangement, there are going to be various tax rates, setup costs and other conditions that are particular to the structure of your business.

If you are planning on restructuring, make sure you have sought advice on how this is going to alter your business’s existing circumstances.

5. Have you carried out a valuation of the business?

You should get a proper valuation of goodwill and arrange an inspection and valuation of premises, fixtures, fittings and equipment, valuation of stock and work in progress.

One of the biggest dangers for first time business buyers is skimming the surface on details like this.

You should know exactly what you’re getting when you purchase a business, and any failure to check for problems could spell trouble down the path when looking to either sell assets, or the business itself.

You should be happy with what you’re getting. If there are issues, make sure that you take these up with the vendor and ensure that necessary contractual adjustments can be made if need be.

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