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Five Questions You Should Ask Yourself When Purchasing an Established Business

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Starting a new business can come with many risks. For example, you cannot always be sure if the market will be receptive to your business, if you can secure a loyal customer base, or if your business can even turn a profit in the long run. However, you can reduce these risks by purchasing an established business. This is because you can study the business and understand its viability based on past performance. 

If you are looking into purchasing an established business from its current owner, there are many questions you should ask first. This article explores five of those questions to ensure you buy the right business.

1. Do You Have Enough Capital to Purchase the Business?

It is rare for a purchaser to have enough capital on hand to fund the purchase of an existing business without accessing external capital. Generally, a purchaser borrows an amount equivalent to the business purchase price and costs from a lender like a bank. The bank may:

  • require you to provide certain property as security for the loan;
  • impose conditions on how you can conduct your business; and 
  • require you to provide certain information on request as a condition for lending you the money. 

You should consider both the commercial and legal implications of obtaining a loan before borrowing, and you should ensure that you can repay the loan. Generally, lenders have the upper hand when it comes to negotiations. However, there is still plenty of room for negotiation, including determining the security they require or the restrictions on your business’ operation.

2. Are You Satisfied With the Due Diligence?

Before purchasing an established business, you want to complete due diligence and be happy with your findings.

Due diligence is the process of studying all aspects of a business to form a view of its strengths, weaknesses, and risks.

A purchaser uses the knowledge from the due diligence process to:

  • determine the purchase price that the purchaser is willing to pay for the existing business; and 

  • whether the business fits within the purchaser’s risk appetite. 

Therefore, during the due diligence process, you must review all existing legal agreements regarding the business operation and assess the business’ financial performance and viability. In addition, you should raise any material issues that you identify from the due diligence with the seller and deal with them appropriately. 

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Due Diligence Guide for Purchasing a Business

Before buying a business, it is important to undertake due diligence, to verify the information supplied by the seller. This guide will walk you through the due diligence process.

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 3. What Outgoings Are Involved in the Established Business?

You should clearly understand the business’ outgoings before purchasing the business. To explain, outgoings are the costs associated with running a business, including:

  • operational costs;
  • rent;
  • maintenance costs of the business; and
  • employees’ salaries.

Consequently, if there are significant outgoings for an established business, this will generally lower the purchase price.

You should engage with a competent accountant to help you review the business’ financial documents and understand the outgoings.  

4. Does Your Sale and Purchase Agreement Have Adequate Restraints for the Seller?

After you complete your due diligence and decide to purchase the business, you must sign a sale and purchase agreement with the seller. This document sets out the terms and conditions of the purchase. Thus, it is crucial for the sale and purchase agreement to set out any agreed restrictions upon the seller after the sale. Such limits ensure that the seller does not use its knowledge of the business and market to compete against the business after the sale. For example, there are usually restrictions on the seller operating or joining a similar business to the purchased business for a specified period after the sale.

Furthermore, it is common for there to be restrictions on approaching any:

  • employees;
  • suppliers;
  • or customers

of the business for a purpose not in the interest of the business you are purchasing. 

5. What Conditions Precedents Are Under the Sale and Purchase Agreement?

Generally, the sale and the purchase agreement will set several conditions that parties must meet before the financial settlement occurs. Therefore, if parties do not meet some conditions, the financial settlement cannot go ahead unless the parties agree to waive them. 

These conditions are called conditions precedent. It is essential to consider the steps to satisfy each condition precedent. Likewise, be sure to start the process to satisfy them well before the financial settlement. Suppose the seller cannot meet some of these conditions before the financial settlement. In that case, you should classify them as a condition subsequent, which needs to be met within a specific period after the financial settlement.

Your lawyer and any other professionals assisting you with the purchase will help you satisfy the conditions precedent and work with the seller to complete the purchase. 

Key Takeaways

Becoming a business owner is significant and comes with many risks and benefits. This article explores five questions you should consider when purchasing an established business. So, you should ask if you: 

  • have enough capital for the purchase; 
  • are satisfied with the due diligence of the business, including its outgoings; 
  • are satisfied with the restrictions on the seller after the sale; and 
  • are confident that the conditions precedents can be satisfied within the agreed period under the sale and purchase agreement.

If you need help with purchasing an established business, our experienced business purchase lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is the due diligence process?

Due diligence is the process of understanding all aspects of a business to gain insight into its strengths, weaknesses and risks. This allows a purchaser to determine what price they are willing to pay for the business and whether or not it is worth buying. 

What is a sale and purchase agreement?

A sale and purchase agreement sets out the agreed terms and conditions of the purchase. This will also set out any agreed restrictions upon the seller after the sale takes place and any conditions precedent or conditions subsequent.

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