Buying an existing business with a proven track record is a great option if you dream of owning your own business, but you don’t want to start from scratch.
Many businesses are available for sale through online platforms like realestate.co.nz, NZ BizBuySell or Trade Me Marketplace. Or you could ask a broker to help you find potential target businesses.
However, before you make an offer, it's critical to do thorough research and due diligence to make sure you're paying a fair price.
Here are some insights and tips to help you make an informed decision when buying a business in New Zealand.
Before you sign the deal
Buying a business is a significant decision that should never be taken lightly. Before you make an offer, you should:
- Get a deep understanding of the industry you're about to enter.
- Investigate the target business's market, suppliers and competitors to assess its competitive position.
- Get professional advisers, such as lawyers or accountants, who will act for you and can advise on your best interests.
- Ask a wide range of questions about the business to uncover any hidden issues that could affect post-sale revenue, such as the potential loss of key customers.
Here are the key steps you should take before buying a business.
Do thorough due diligence
It might seem tedious, but you should never cut corners on due diligence when you're buying a business. Your research helps you unearth any business or industry risks, assess its profitability and determine whether the seller's estimates and projections are realistic.
During due diligence, you should identify any legal issues, such as checking if the business has any current or pending court cases or legal disputes, and confirm who owns the business assets, including intellectual property (IP).
Look over key contracts, including employment contracts, sales, suppliers, rent and service level agreements.
Look at the loyalty of the key staff members, customers and suppliers to the business. It's possible their loyalties lie only with the current owner.
Get legal advice first
Before you commit to the sale, as well as the sale and purchase agreement, there are many legal agreements you should get hold of to review and sometimes renegotiate when you're buying a business.
When you're ready to sign the sale and purchase agreement, your lawyer can help:
- Structure the transaction.
- Check vendor warranties are adequate.
- Make sure any assets included in the sale are properly defined.
- Advise whether you should set up a subsidiary company or a special purpose vehicle (‘SPV’) to buy the business.
- Navigate the sale completion process, which could be complex. It might mean transferring employees, reassigning the lease for the premises and seeking counterparty consent to assign key business contracts.
Independently value the business
You might be able to assess the business's value on your own. To make sure you're not overpaying, it's essential to have access to the correct information (which can be obtained during due diligence). Standard valuation methods also exist for this purpose, and your accountant or an independent valuer can help you make sure the asking price is not inflated.
Valuing a business involves several disciplines, including financial statement analysis and market economics.
The final sale price will be set by the specific motivations of each of the seller and buyer, as well as the strength of their negotiating positions.
Consider a gradual handover
Some buyers prefer to structure the purchase price to pay it in instalments from business profits or pay in a way that's partially determined by a specific formula after handover.
Typically, sellers prefer to get the purchase price in one lump sum on handover. So, how you structure the payment will often have an impact on the agreed value.
Separately, you may want to think about a gradual handover so the seller stays involved in the business for some time after the sale is completed.
This can be particularly useful where you aren't familiar with the industry you're entering or where key employee, customer or supplier relationships are tied to a special relationship with the seller. This gives you some time to build those relationships yourself and will ensure a smoother handover.
Plan for business restructuring
If the business you're buying has employees, will you retain them after purchasing the business? If you want to keep the existing employees, you will need to expressly provide for this in the sale and purchase agreement.
If you decide not to retain any existing staff, the seller must take care of any redundancies before you take over.
Either way, you must comply with employment law. These obligations can change depending on the following:
- How the existing employment agreements are drafted.
- The size of the business.
- Whether you're employing vulnerable workers.
So, it may be an exciting and busy time, but think ahead to make sure the process is painless and straightforward.