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Traps to avoid before buying a small business

Sylvia Pennington
Business Journalist

Sylvia Pennington writes regularly on business and technology for the Sydney Morning Herald and The Age

Sylvia Pennington
Business Journalist

Sylvia Pennington writes regularly on business and technology for the Sydney Morning Herald and The Age

Keen to become your own boss and considering buying a small business rather than starting your own? We look at the top things to keep an eye out for.

Planning on joining the two million Aussies who run their own small businesses? Starting from scratch can be a daunting proposition and taking over an established operation can be an attractive proposition.

As a start, the chances are that it will be easier to secure finance on a well-run operation with a solid client base, rather than a new idea and a business plan.

You also may inherit experienced employees who are willing to stay on and a reliable income from the get-go, rather than the hard work and finger crossing that can be part and parcel of getting a brand new venture off the ground.

Though it’s important to realise not every business that comes on the market is a gold mine set to yield a rich dividend for the next proprietor who happens along. Pulling them back to profitability may require a significant investment in time and money.

Do they represent a low priced opportunity for turnaround triumph or a truckload of trouble for a new owner? It’s your call.

Empty coat hangers line a rack

Do your homework

Before signing papers, experts recommend you do plenty of homework. Seeking advice from professionals should mean less chance you’ll pay over the odds or overlook red flags when sizing up a potential purchase.

Principal of The Franchise & Business Lawyers, Elizabeth Gore-Jones, has seen scores of small businesses change hands and says there are pitfalls aplenty for unwary buyers.

Elizabeth’s top 5 traps for first time buyers

  1. The lease. If you’re taking over an existing lease you’ll be bound by its terms. It’s vital you ascertain what these are and whether there’s an option to renew. This will avoid learning your new business only has two years left to run resulting in being without premises, or facing an extensive relocation bill
  2. The financials. It’s a business, not a charity – so you need to be satisfied the figures aren’t rubbery. Any contract should be subject to due diligence enquiries and a review by your accountant
  3. Background checks. Who owns the business and are the assets theirs to sell? Don’t take their word for it – have your solicitor run a bankruptcy check on the owner, a company check on the business and a Personal Property Securities Register check to ensure assets are unencumbered
  4. Franchised businesses. Contemplating a franchised business? You’ll be entering a long-term relationship with a third party – the franchisor – so it’s sensible to get a sense of whether it’ll work for you before signing on. Spend time with them and speak to other franchisees about what life’s like inside the tent
  5. Conditional upon finance. Unless you’re a cash buyer, it’ll be you and the bank taking the plunge together. Don’t assume ‘she’ll be right’. She won’t if the money doesn’t come through, so make any contract conditional upon finance approval
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