Purchasing a small business? What you need to know

Buying an existing small business can be a great way to jump-start your entrepreneurial journey. You gain an established customer base, an existing brand reputation, and the equipment or stock needed to operate from day one. The business also has a track record of financial performance, so you can review its past sales and profits and better understand what to expect. Plus, you inherit existing operational setups like supplier relationships and processes, which can be easier than building everything from scratch. Even with these advantages, you should still do thorough due diligence to make sure the opportunity is as good as it appears.

Due diligence means thoroughly reviewing all business aspects before committing to the purchase. This includes examining the financial statements from the past 3–5 years, profit & loss, cash flow, and balance sheets for any irregularities, seasonal fluctuations, or downward trends in sales. You should also verify that the business has met all its tax obligations and has paid its employees’ entitlements, such as superannuation. Identifying any outstanding debts or liabilities – like equipment leases, supplier bills, loans, or accumulated employee leave – is essential since you would assume these after buying. Additionally, check the condition of the business’s assets and inventory, be wary of any unsellable stock, and have a legal professional review key contracts such as property leases, supplier agreements, or franchise contracts for any terms that might affect you as the new owner. In short, due diligence is about ensuring the business is as profitable and compliant as the seller claims, with no hidden surprises.

North Advisory can guide you through the due diligence process to help you make sound decisions. We’ll review the business’s financial statements from several years to spot red flags like irregular figures or a declining sales trend. We also check that the business has complied with all tax requirements and is up to date on paying employee obligations like superannuation. Our team will identify any outstanding debts or liabilities attached to the business and verify what assets and inventory the company has. We’ll also highlight any important contracts or legal commitments – for example, a premises lease, supplier contracts, or franchise agreements – that your lawyer should examine carefully. North Advisory has helped many prospective business buyers with this process, so we know how to spot the key details and give you peace of mind before you buy.

Determining a business’s value requires looking at its finances as well as some big-picture factors. Start by evaluating the business’s past and current earnings and the net value of its assets. Then consider intangible elements like goodwill – for instance, the business’s reputation or brand value – along with the outlook of its market, the level of competition, and any growth opportunities. It’s also crucial to assess whether the current revenue is sustainable. For example, ask if the business relies on just a few key customers or a single product, and if so, will those customers stay or that product remain popular after the ownership changes? By examining these factors, you can come up with a fair price for the business.

The ideal business structure for buying a small business depends on your circumstances, because each option (sole trader, partnership, company, or trust) has its advantages and implications. The key is to choose a structure that fits your financial and tax goals while protecting your interests. Setting up the right structure can optimise your tax position and manage risks effectively. Discussing this with a business advisor or accountant is a good idea, they can recommend the most suitable structure for your situation.

After buying a small business, it’s important to have a solid plan to operate and grow it successfully. Begin by setting up a reliable bookkeeping system and using user-friendly accounting software (for example, Xero) to keep track of your income and expenses from day one. You should also prepare a budget and cash flow projections for at least the first year of operation – this gives you targets to aim for and a baseline to monitor how the business is performing. Keep a close eye on your financial reports (like monthly profit & loss statements and cash flow) to see if the business is meeting expectations, and be ready to adjust your plan if things change. Ensuring you remain profitable and setting aside money for taxes and other obligations is crucial. Lastly, don’t try to do everything alone – consider getting ongoing advice from a business accountant or advisor who can help you track progress, stay compliant with tax rules, and identify opportunities (such as government grants or efficiencies) to improve and expand the business without taking on unnecessary risk.

North Advisory stays by your side after the purchase to help your new venture thrive. We’ll assist in setting up a proper bookkeeping system and accounting software (like Xero) to manage your finances smoothly. Our team will work with you to create realistic budgets and cash flow forecasts for your first year, giving you a financial roadmap to follow. We also schedule regular check-ins to review your numbers, so we can help you monitor the business’s performance and adjust the plan as needed. As your business grows, our ongoing advisory support keeps you informed about your tax obligations and any available government incentives, and we’ll advise you on expansion opportunities that won’t expose you to unnecessary risk. Essentially, North Advisory becomes your financial partner – helping you stay profitable, compliant, and poised for sustainable growth as you move forward in your business journey.