Buying a Business in Western Australia – Part 2 – Due Diligence vs Business Validity Deep-Dive

| Business, Wealth, Accounting

In part one of this blog series on Buying a Business in WA, it was highlighted that you definitely need to do more than a limited due diligence before buying a business.

 

You need to buy a valid business.

 

As you go about the journey of buying a business, you will have many questions. The usual journey is something like this:

 

  1. You initially think about buying a business, generally
    • What's involved in the whole process?
    • How do I find out about available businesses for sale?
    • How much money (profit) can I make?
    • Gee it's risky, how do I de-risk? You start to educate yourself by reading blogs, listening to podcasts, watching YouTube videos/TedX talks.

 

  1. You begin to have an idea of what type of business you want to buy
    • How do I find this type of business for sale?
    • What risks are there for this type of business?
    • What business loans are available?
    • What business operations are key to succeed?
    • What are the compliance/legal burdens?
    • How much will it cost?

 

  1. You find a business you think you want to buy
    • How to obtain finance?
    • How to assess if it’s a good business to buy?
    • How to work out a fair value for the business – don't get ripped off!
    • This is when you need a Business Advisor to step in, steady the enthusiasm and help validate that the business is a worthwhile option for future success.

 

  1. You are ready to buy the chosen and validated business
    • How to make the offer?
    • Include a due diligence clause.
    • Include a finance clause.
    • How to negotiate?
    • Deal with the legal risks before making the offer.
    • Deal with tax structuring and planning, including duty, before making the offer.

 

  1. The agreement is signed and settlement happens
    • Conduct due diligence…. Is (already done) validity analysis still valid?
    • Finalise finance.
    • Transition into the business as soon as possible.
    • Your business journey is only really getting started now.

 

You can see that around stage three, when you find a business you think you want to buy, this is when you need to seriously consider whether the business is valid.

 

Broadly, a valid business is one which is going to make more and more sales, more and more profit over the years; is going to be possible to operate, keep tax to a minimum and remain legally compliant; and is going to make you happy.

 

It’s worth pointing out at this time that… Owning a business is going to be bloody difficult!

 

It's common to hear from aspiring business owners about how marvellous they will be at delivering an exceptional product or service to the customer. The hopeful story usually goes something like this, “I've been in this industry for many years and I know better than most of my would-be competitors, meaning I will give the customer what they want better than others at a lower price, so of course customers will come to me and therefore, profit!”

 

The trouble being that their focus is limited to this, usually meaning they think this is the hard part of owning a business. Well, that certainly is not the case!

 

There’s a quote by famous marketer and #1 Wall Street Journal Bestseller, Donald Miller, which succinctly articulates why being the best at what you do, by itself, won’t cut it in business: “Human beings do not buy the best product or service. They buy the ones they can understand the fastest.”

 

Since customers don’t always buy the best product, we know that a valid business isn’t simply one which can produce the best product. Rather, just one key component in assessing the validity of a proposed business purchase is to really determine whether the business will have customers in the short and long-term.

 

Because the world’s best entrepreneurs don’t want to buy a dud or dying business, what they do is complete a Business Validity Deep-Dive which helps with checking this, plus many more aspects required in order to determine whether a business is valid.

 

A Business Validity Deep-Dive complements a Due Diligence.

 

Neither a Due Diligence nor a Business Validity Deep-Dive replaces the other. Instead, smart entrepreneurs complete both.

 

The Business Validity Deep-Dive is done first to validate that its worthwhile pursuing a business purchase.

 

Later in the buying process, throughout negotiations and before settlement, a thorough Due Diligence is done as a double-check method to re-validate that the specific business is worthwhile purchasing, doesn’t have any hidden risks and is being purchased at the right price.

 

As emphasized in part one of this blog series, although some may say only a limited due diligence is necessary; we contend that this is a dangerous approach to buying a business.

 

Buying and owning a business is just far too important, far too complicated, to risk not doing both a Business Validity Deep-Dive and a thorough Due Diligence.

 

In the third instalment of this four-part blog series, we address the important “boring stuff” such as tax compliance. Later in the final fourth instalment we will bring everything together to help you avoid buying a Titanic and introduce you to the exact framework to follow.

 

Our next FREE event is on Tuesday 26th November and is strictly limited to 12 aspiring business owners. You can reserve your seat here: https://bit.ly/2qsb2oG

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