Buying a Business

A decision to buy a business can be an exciting one, presenting you with both opportunities and challenges that need to be assessed before committing yourself. Buying a business is a significant investment of time and finances and you should evaluate not only the business opportunity itself but also your abilities to run a business.  Will the business be suitable to your lifestyle? As an independent business owner, you should consider your skills in the roles of marketer, bookkeeper, human resources manager, accountant and research & development.  You can be responsible for all these aspects of the business until you employ appropriate staff!

Buying a business is a serious undertaking so it's important that appropriate legal and financial advice is sought prior to signing any documentation. The business seller, business broker or franchisor should be prepared to provide you with sufficient information to conduct a due diligence in respect of the business. You should be wary if they're reluctant to do so.

Warning Signs

A key consideration when selecting the appropriate business to purchase is to look for the warning signs.  Prospective purchasers should be wary of advertisers who:

  • claim that you can make large amounts of money quickly and with little effort;
  • are reluctant to provide written information;
  • require upfront payments before any information is released; and
  • are reluctant to provide financial information about the profitability of the business.

Due Diligence

Here are lists of due diligence items that may assist you. This is not comprehensive and is not a substitute for obtaining independent legal and financial advice from qualified advisors.

  • Does the business have a good reputation? Check with customers, suppliers and credit reference associations. You can also search the business on the internet to ensure that there are no undisclosed adverse issues
  • Review the ownership documentation of the business including conducting company searches to verify the vendor (see www.companies.govt.nz)
  • Obtain a comprehensive list of the assets being sold and verify the condition of the assets. Do they comply with all relevant regulations including occupational health and safety? Are the assets adequately insured until settlement? Are you able to obtain similar insurance?
  • If any of the assets are leased, are the terms reasonable and can you take over the existing leases or will they be paid out by the vendor?
  • Obtain a list of employees including full salary and entitlements so that you can verify the employment costs against the financial accounts. Will key staff continue employment with you? What if they don't?
  • Obtain a list of intellectual property including all trademarks, patents, brand names, logos, etc. and verify ownership of these (see www.iponz.govt.nz). Will these be transferred as part of the sale? 
  • Have you checked with the relevant authorities in relation to permits or licensing obligations in respect of the business or the premises? E.g. retail food premises may require Food Registration Permits, Liquor Licences or Footpath Trading permits. Are the permits and licences transferable?
  • Further, if the business to be purchased involves transferring employees, employment agreements will also need to be drafted. Does existing stock include old, unsalable or items that no longer fashionable?
  • Have existing stock levels been run down? If so, you may need additional cash flow to build up to a reasonable trading level. Will you be able to increase sales with current resources?
  • Obtain a copy of the lease to any premises that is relevant to the business to determine there is sufficient tenure to operate the business and that the terms are otherwise in accordance with market conditions. Will any new or planned developments nearby affect your trade?
  • Obtain financial accounts in respect of the business for the previous three financial years. How realistic are historical costs as a percentage of sales? Would your cost structure differ greatly?
  • Review customer lists to determine the strength of the relationship between the customers and the business
  • Review material contracts and determine whether those contracts can be transferred to you
  • Obtain confirmation that all taxes and Accident Compensation premiums are up to date
  • The draft Agreement for Sale and Purchase of a Business should include comprehensive warranties provided by the vendor and its directors as required by your advisors
  • Does the Agreement for Sale and Purchase of a Business include a restraint of trade clause binding the vendor and its directors to not compete for a period of time and within a certain distance of the business
  • If the purchase is subject to approval of finance by your financier a relevant condition should be incorporated into the Agreement for Sale and Purchase of a Business.
  • If its a franchise you are buying obtain a copy of the disclosure document and franchise agreement and read them thoroughly

Professional Advice

Before committing yourself to any business purchase, you should seek professional advice from your accountant, lawyer re the agreement for sale and purchase, leases, franchise agreement etc), and if necessary from appropriate financial advisers.

In order to obtain the greatest assistance from your professional advisors, you should seek to obtain as much financial details of the business as possible.  This will aid in making an informed decision about the business being purchased.

Ready to buy? You may need to consider finance and business lending.