If you are thinking about a new venture, expanding an existing business, or entering a new market, buying an established business is an option worth considering. There are both advantages and disadvantages compared with starting your own business. Evaluating the pros and cons, and carrying out due diligence beforehand to assess the value, risks, and potential of a business, will help you make an informed decision. An experienced lawyer can guide you through the legal complexities and due diligence process.
Advantages and Disadvantages
Buying an established small business offers several benefits. First, you will usually inherit an existing customer base, which provides immediate cash flow and revenue. This can save time and effort needed to build a customer base and goodwill from scratch. Additionally, an established business often has existing relationships with suppliers, distributors, and other stakeholders. These connections give you a head start in identifying key resources and entering the market. Brand recognition and goodwill associated with the business can also help establish credibility in the industry.
Starting your own business allows for greater control, flexibility, and customisation. You can build the business according to your vision without inheriting existing issues or limitations. Starting from scratch enables you to choose the location, design the infrastructure, and hire a team aligned with your strategic objectives. However, this approach requires a significant investment of time and resources. Success is not guaranteed in the early stages.
Due Diligence when Buying a Small Business
Due diligence is essential for anyone considering an established business purchase. This process involves a comprehensive investigation and analysis of the target business to assess its value, risks, and growth potential. It includes reviewing the financial, legal, operational, and human resources aspects of the business. By performing thorough due diligence, you can identify and mitigate potential risks and make an informed decision about whether to purchase the business and what assets to acquire.
Financial and Legal Due Diligence
Financial due diligence involves reviewing the business’s financial statements, tax records, cash flow, and debt obligations. This helps evaluate the accuracy and reliability of the seller’s information, assess profitability and financial health, and uncover potential financial risks or liabilities.
Legal due diligence focuses on examining contracts, licences (including liquor licences), leases, permits, and regulatory compliance. It ensures the business has clear title to its assets, and that there are no legal disputes or pending litigation affecting operations. Compliance with relevant laws and regulations is also checked. For example, a Service Station must have development approval to operate and confirmation that trading hours are supported by its approval.
Another aspect is reviewing existing agreements. Contracts with customers, suppliers, landlords, and other stakeholders should be assessed for terms, obligations, and potential risks. This ensures you understand existing relationships and can manage associated costs and obligations after acquisition.
A lawyer can assist with legal aspects, such as assessing supply agreements, reviewing contract terms, and investigating obligations under agreements to be assigned to the new owner. Accountants help with financial due diligence by analysing accuracy of financial information and identifying potential risks or liabilities.
Operational Due Diligence
Operational due diligence examines business processes, structure, systems, equipment, and infrastructure. You may evaluate the supply chain, production capabilities, technology, and intellectual property, including social media accounts. This helps understand operational efficiency and identify risks or inefficiencies.
Human resources evaluation is also part of operational due diligence. This includes reviewing employment contracts, assessing benefits and compensation, and identifying potential employment issues. It helps assess workforce quality and plan for necessary changes or restructuring. A lawyer can guide on employment matters, ensuring compliance with employment laws and assisting with employee transfers or restructuring if needed.
Conclusion
Whether you buy an established business or start your own, due diligence is a crucial step. Competent legal and financial advice helps entrepreneurs minimise risk and make informed decisions about their venture.
This is general information only. You should obtain professional advice relevant to your circumstances. For more information or assistance, contact us at (02) 9221 1088 or email .