5 Questions to ask when you are buying a business

Posted 11 Aug '23

5 Questions to ask when you are buying a business

Purchasing an existing company is a great way to expand your business empire. You can buy out a close competitor or dip a toe into a new industry and expand your reach as a business group. But whatever the reason for the acquisition, you need to ensure you’re not buying a lemon!

Doing your research is a crucial part of the purchase process. As is asking some probing and insightful questions to help you determine if this acquisition is a good (or bad) idea.

Questions to ask before you make an offer:

Buying another company is a major business decision. It’s a large outlay of capital and a big responsibility to take on. If you’re going to take the leap, it’s important to make sure the company in question is stable, well-managed and has a good future ahead of it.

Here are five vital questions to ask before entering into a purchase:

1. Why is the business for sale? There are many reasons why an owner might want to offload a company, not all of them good. Their sales may be dropping, they may have rising debts, there may be internal problems with staff or the market for their product/services may be coming to an end. Find out why, so you don't buy a clanger.

2. Is this a good industry to step into? Do your research on the industry, competitors, and marketplace that the business currently trades in. It's important that you step into an industry sector that has potential for sales, growth, stable revenues and potential profits. With volatile markets post-pandemic, looking at predictions and forecasts for your chosen industry niche makes good sense and helps you make an informed decision.

3. Have you done your due diligence into the business? Do your due diligence to make sure there are no financial, legal or HR skeletons in the cupboard that may jump out to surprise you. Is there an unpaid tax bill? Are there loans that are being defaulted on? Are there any legal cases being brought against the company? Has the business filed all its returns and accounts? As the new owner, any of these issues become your responsibility, so you want to check out the company’s records and history in as much detail as possible. This will prevent some major headaches further down the line.

4. Does it have an existing business plan? You'll need a business plan that takes the company forwards and gives you a pathway for your next steps as the owner. Is there a business plan you can use? When was the plan last updated? How well are they tracking against the milestones in that original plan? No business plan is written in stone, so you’ll almost certainly need to review, update and refine this strategy post-acquisition.

5. Are your management team and staff up to scratch? When you buy the business, you'll usually also be inheriting the team behind that company. Do you have a management team with the skills, experience and motivation that's needed? Are your employees engaged and do you have a big enough team to meet your own goals for the business? This team will be vital to your future success, so you want the best possible people and talent behind you as you steer a new course for the company.

Purchasing a business can be a complex and protracted process, even once you've completed all your due diligence and background checks. If you are considering a business acquisition please contact your WDF team member on 02 6921 5444 or email accountants@wdf.com.au. 

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