Planning to buy a business? Why you must first research the purchase
Gather as much information as you can about the business you're thinking of buying. Your professional advisers can help you carry out independent checks to make sure the information is authentic.
Some of the types of information that will help you make the right decision are listed below.
- financial statements — balance sheets and profit and loss statements, preferably audited, for at least the past three years
- income tax returns and assessments for the same three-year period, including a reconciliation of taxable income and profits for each year
- present value of assets, e.g. the real value of freehold
- details of any liabilities not included in the latest balance sheet, e.g. long service leave
- financial statements since last year end; if not available, alternative financial data to allow analysis of trend of operations
- source and availability of raw materials or products
- tenure of leased premises and prospects of renewal
- state of buildings and equipment and anticipated requirements for replacement
- source of labour and likelihood of it improving or deteriorating
- capabilities, experience and age of key personnel, including compatibility with you
- market situation and influence of competitors
- location of customers and method and cost of delivery
- whether the business is operating in a growth industry.
Goodwill creates the earning power of a business and is often the most difficult area of business valuations to negotiate. Factors affecting goodwill value include:
- whether the business is successful and profitable, with earnings above a fair salary
- the lease of the premises
- the potential of the business
- competition from other businesses
- the business name
- the special skills of staff.
This content was first published on www.business.tas.gov.au