Buying a Trade Business: What to Check Before You Pay

What should you check first when buying a trade business?

Start with the earnings, then ask who earns them. A trade business is worth what its profit is worth to you, and the profit depends on people, licences and customer relationships more than on assets. A useful order of work is this.

1. Rebuild the earnings to what a new owner would keep.
2. Establish the owner’s role and what replaces it.
3. Check the licences, customers and contracts, and what transfers.
4. Inspect the fleet, work in progress, retentions and staff entitlements.
5. Take advice, test the price and negotiate.

How do you check that the earnings are real?

Reported profit is the seller’s starting point, not the answer. Ask for the profit and loss statements and balance sheets for the last three years and the year to date, then reconcile them to tax returns, business activity statements and bank statements. Differences need an explanation.

Then look at the adjustments. A seller’s figure often adds back the owner’s wage, private costs and one-off items, and it should deduct a market cost for the work the owner does. Each add-back needs evidence: an invoice, a statement or a contract. An unsupported add-back inflates the earnings you are paying for.

Look at the trend as well. A year with an unusual jump in profit, a large one-off job or a cut in spending that cannot last deserves caution, and three years usually say more than one. Our guide on how trade businesses are valued explains how earnings are normalised, and EBITDA multiples for trade businesses explains why an advertised multiple tells you little.

What does the owner do, and will the business work without them?

Many trade businesses are the owner. They quote, supervise, work on the tools, hold the licence and know every customer. If you are buying an owner-operated business, you are buying the right to take over that role, and you should price it as a wage.

• How many hours does the owner work, and on what: the tools, quoting, supervision or administration?
• Who deals with each major customer?
• What happened the last time the owner took three weeks off?
• How long will the owner stay on after completion, in what role and on what terms?

A handover agreed in writing before completion is worth more than a promise to “help out for a while”. The terms of a handover are for your lawyer. See valuing a business with owner dependency for how the owner’s role is measured.

Will the licences, customers and contracts transfer?

These decide whether the earnings are yours to keep.

• Licences. Who holds each licence the work requires, and will you or someone you employ be able to hold it from day one? Trade licensing is state-based, and the rules for a company and an individual can differ.
• Customer concentration. What share of revenue comes from the biggest customers, and how long have they been customers? See customer concentration.
• Contracts. Which are written, when do they end, and do any restrict assignment or require consent on a change of ownership? See recurring maintenance contracts.
• Supplier and finance arrangements. Trade accounts, vehicle finance and leases may be personal to the seller.
• Subcontractors. Which would stay, and how are they engaged? See valuing a business that uses subcontractors.

What the clauses mean, and how they can be dealt with, are questions for your lawyer.

What can the headline price leave out?

Four items in particular can add to what you really pay, and the illustrative example after them shows the effect.

• Fleet condition and finance. Vehicles and plant that are due for replacement are a cost you will meet soon, and finance on them may or may not transfer. See does equipment add to business value.
• Work in progress. Jobs part-complete at completion carry costs still to be incurred and revenue still to be received. Who benefits from deposits already taken, and who completes the jobs, needs to be agreed.
• Retentions. Customers often hold back part of a contract price until a defects period ends, and the business may hold back part of what it owes subcontractors. Who is entitled to what, and who carries defect and warranty obligations on work done before completion, should be settled.
• Staff entitlements. Accrued annual leave and long service leave belong to employees. How they are dealt with in the price is a negotiation and a question for your lawyer and accountant.

One structural question changes what all of these checks are checking. Whether you buy the business assets or the company that owns them changes which liabilities, licences and contracts come with the business. That is a decision for your lawyer and tax adviser, and it is better asked early than late.

What should you ask the seller for?

A serious seller expects a buyer to ask for evidence. A reasonable request list for a trade business covers the following.

• Financial statements and tax returns for three years, and business activity statements for the same period.
• Revenue by service line, and a customer list showing revenue and tenure for each major customer.
• Copies of the main contracts and maintenance agreements, with renewal dates.
• A licence register showing who holds each licence and when it renews.
• A schedule of vehicles, plant and equipment, with age, condition and finance owing.
• A work in progress schedule, a retentions schedule, and the debtors and creditors ledgers.
• A staff list with roles, pay and accrued leave, and a schedule of subcontractors with amounts paid.
• Insurance details and claims history, the premises lease, and any warranty or defect claims.

Our guide on documents needed for a business valuation explains why each of these matters to a valuer, and most of it also serves a buyer.

How does an independent valuation help a buyer?

It gives you a reasoned view of what the business is worth, prepared by someone with no stake in the sale. You see the normalised earnings, the assumptions, the risks and a valuation range, and you can compare them with the asking price and with the seller’s own figures. If they differ, you know why, and you know what to ask.

• It tests the asking price against the earnings, rather than against a rule of thumb.
• It identifies the risks that should reduce the price or shape the terms, such as owner dependency, a large customer or an ageing fleet.
• It gives you and your accountant a shared basis for negotiation.
• It shows what to ask in due diligence.

A valuation is as at a date, and it relies on the information supplied. For a buyer, much of that information comes from the seller, so tell us at the start that you are the buyer. An Independent Business Valuation is $1,995 + GST, with a draft provided before the report is finalised and a typical turnaround of 3 to 7 business days once all required information has been received. See business sale valuations and pricing, or begin at our start page.

What are the warning signs?

• Records that cannot be reconciled to tax returns, activity statements and bank statements.
• A reluctance to show customers, contracts or payroll until late in the process.
• A recent jump in profit with no clear cause.
• One or two customers providing a large share of revenue.
• Verbal arrangements where written agreements would be normal.
• A licence that only the seller can hold.
• Key staff or subcontractors who are expected to leave.
• An asking price justified by a rule of thumb rather than by earnings.

None of these is necessarily a reason to walk away. Each is a reason to ask a question and, where the answer matters, to price it or build it into the terms.

Legal due diligence, tax advice, finance and insurance belong with your lawyer, accountant, financial adviser and broker. A valuer’s part is the value and the reasoning behind it. If you are on the other side of the table, see how to sell a trade business.