11 HIDDEN PROBLEMS TO LOOK OUT FOR WHEN BUYING A BUSINESS – THIS COULD SAVE YOU THOUSANDS

Buying a business can be one of the best financial decisions you make.

Buying an established client base, location and staff can mean that you can get to work in making that business the best it can be.

However, as many people who have bought businesses will tell you, there are often unwelcome surprises lurking beneath the surface. These surprises can rudely reveal the business to be a cleverly disguised money pit. In these instances, it can take thousands to get the business to your standard. 

Always seek advice from a lawyer and accountant before purchasing a business. This article is intended to be a guide only.

Here are some of the hidden things you must consider when buying a business:

Are the computers and software up to date?

So often, businesses are acquired without looking into the software licenses that are being used in the business. Getting a business with decade old hardware and software that gets more useless with every day can result in $000’s in costs replacing it, licences and training. If you find this issue to be relevant to your situation then make sure this is factored into your offer for the business.

Is all the equipment owned outright?

When buying a business it is absolutely crucial to know what the business owns and what it is still paying for. Getting this wrong can result in the profits that you thought you would make goes instead into paying off costly equipment. The purchaser should always receive the assets free of encumbrances. Make sure that you do the math on this, see if the business still makes financial sense, take this into account when making an offer.

Is the website up to scratch?

Your website is your virtual storefront in the digital world we live in. Having an outdated or poorly functional website can cost the business new clients, credibility and lost revenue.

If a new website is necessary, this can incur a cost of thousands of dollars and weeks of time for the website to be built. If this is the case for you in your situation, make sure you take this into account in deciding whether or not buying the business makes financial sense. If you intend to make an offer, get some quotes on getting a new website built and keep this in mind when making an offer.

Do you have all necessary administration access and logins?

It is of critical importance to have all administration access and login details to all software, software subscriptions and accounts. Not having this can result in hours of frustrating searches, infuriating call arounds, and tedious email back and forths. Worst case scenario, it can mean that you need to completely replace something of critical importance. 

  • Accounting software & hardware
  • Website
  • Hosting
  • CRM
  • Social Media Accounts
  • Mygov
  • Google Ads
  • Google My Business
  • Google Analytics
  • Google Tag Manager
  • Facebook Business
  • Paypal
  • Afterpay just to name a few.

If you decide to buy the business, make sure you take the time to get all login details, all administration access and keep a clear record of it in a safe place. Once sale of the business is finalised, remove previous owner’s access immediately.

Are there any marketing/web subscriptions? What are the terms and pricing?

Having a clear understanding of what online service subscriptions are being paid for is very important when buying a business. These can include online web support, Google Ads/Facebook Ads, SEO and more. Without a good understanding of these can lead to continually paying for something that isn’t worthwhile or cancelling a service that has been providing all of the new clients to the business.

Learn as much as you can about the impact these services are having on the business before buying the business.

Does the business have a good filing system for archive records? Are the records electronic? If they aren’t are there records that should have been destroyed by the previous owner?

Making archive records electronic is often a slow and costly process. It is a crucial consideration when determining an offer price on a business. Not having the right records accessible at the right time can lead to legal liability and mistakes that can cost $000’s.

Getting records destroyed can be surprisingly expensive. You don’t want to buy useless records that will need to be destroyed, so make sure you don’t.

Licensing agreements with suppliers

It is important to have a strong understanding of the licensing agreements with suppliers so that you don’t end up paying thousands. This will also give you a better idea of what future profit margins are possible. 

Employee entitlements, long service leave, holiday pay

These are things that should be adjusted at settlement. If there is an employee that works in the business who has accrued long service leave, this is definitely something you need to be aware of so that you don’t get surprised by an unexpected leave request and a large cost.

If adjustments are not made at settlements for employee entitlements then you will still be liable. Keep this in mind when you make an offer. 

Condition and Age of Equipment

What condition is the equipment in? If you have a printing business, are the printers due for a major service soon? Are there repairs that need doing soon? Are they going to need to be replaced soon? These are costs that people selling the business are not going to want to pay for when they consider selling their business. It will become the new owner’s problem. It’s up to you to find these issues, be aware of them and keep them in mind when negotiating.

Staff Qualifications

Are the staff qualified to do their jobs? Do they have the right qualifications? Not having properly qualified staff can lead to legal liability resulting in potentially hundreds of thousands of dollars in lost revenue for the business. Make sure you know the answer to these questions before purchasing a business.

Why is the business being sold?

Although this may seem obvious, it is of critical importance. This is something that you should put a lot of thought into. If the reason that is given doesn’t feel right or doesn’t make sense, investigate further. The biggest fear of buying a business is paying top dollar for another person’s headache.

Are you in this situation? Make sure you have everything in order before you make the decision to buy the business. Call Hatzis Lawyers if you have any other questions. We’d be happy to help.