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Tips on buying a business

Thinking of buying a business? It’s an exciting thing to consider and can be one of the biggest decisions of your life.

Buying a business can be hugely rewarding. It can also have a number of advantages over building a business from scratch - for example:

  • Less risk - when you’re buying an existing business, provided it’s a sound business, it will usually come with an established customer base, established business systems and processes, trained staff, and an existing reputation and market position. When you’re starting your own business you need to develop all of these things from scratch, so it typically requires more time and effort as well.
  • Easier to obtain finance - potential lenders can see there’s an established business so they know what they’re dealing with and it lessens the risk for them.
  • You could be generating income from the beginning - with a new business it may take some time before income starts to flow through.
  • You can focus on growing the business from the start, rather than simply trying to ensure your business idea is viable. 

However, it’s not without risk and the above benefits assume you’re buying a solid, well-managed business - so it’s essential to do your due diligence properly.  That means doing a thorough assessment of the opportunities, any potential risks or problems, and the value of the business.

Getting the due diligence process right can help ensure you pay a fair price for the business. It will also provide essential information for your business planning, and help set you up for success.

This article describes the key things to consider when you’re buying a business. But before you even start looking at the business, take a step back and consider whether owning a business is the right path for you.

Are you right for business ownership?

If this will be the first time you’ve owned and run a business, it’s worth asking yourself these questions:

  • Do you thrive on challenges? 
  • Would you be able to juggle every aspect of the business – from sales, accounting, admin, tax to customer service? Or employ staff to do this? 
  • Do you enjoy making, and being responsible for, your own decisions? 
  • At the same time, are you prepared to undergo training to develop the skills you need, or to get input from specialist advisers?
  • Are you prepared to work long hours, possibly without the security of a steady income? Have you considered what will happen to the business, and how it will continue operating, when you go on holiday? 
  • Do you naturally look to streamline processes and methods when approaching a task? 
  • Does your family understand the impact that buying a business could have on them and support you unconditionally in your aim? 
  • Are you prepared to take the risk of losing the money you invest in your business? 
  • Do you have several years’ experience in the industry you’re considering entering? 

Answering no to any of these questions doesn’t necessarily mean you shouldn’t buy a business – but you should think carefully about whether it’s right for you. For more on this topic, check out our guide ‘What skills and experience do I need to start a business?

Ten key things to consider before buying a business

Use these guidelines to help ensure you have the information you need to make an informed decision.

1. Know what you’re paying for

Make sure you get a detailed list of exactly what is included in the sale price. Don’t assume that anything is included unless it is written down in the sale and purchase agreement.

For example, check whether the price includes all physical assets such as plant and equipment, stock, premises and vehicles, and intangible assets (known as goodwill).

You should also review any existing contracts with suppliers, landlords, key customers etc. Review their duration, whether the terms are fair, and whether there are clauses which could present problems in the future. In addition, make sure you ask for a comprehensive financial history of the business so you know what you’re buying.

2. Evaluate the goodwill

Goodwill represents the ‘potential future earnings’ that the business is likely to produce, so it can be difficult to put a precise valuation on this. Goodwill compensates the previous owner for the work they have done to generate a profitable revenue stream, such as selecting the right location, recruiting and training staff, establishing supplier contracts, developing a credible and trusted brand and developing a customer base.

Get advice on negotiating a price for goodwill (e.g. from your accountant), and be careful if future earnings are dependent on the existing owner’s abilities and rapport with customers. Some key questions to ask yourself are:

  • Can the business really stand independently of the previous owner and their personality? 
  • How much of the business’ potential would walk out the door with the departing owner? 
  • Is the owner overvaluing the goodwill aspect of their business?

3. Investigate a restraint of trade clause

If a significant part of a business’ value is tied up in goodwill (see above), consider whether you’d want to see a restraint of trade clause in the sale and purchase agreement. A restraint of trade clause can prevent the previous owner selling their business to you, then setting up in competition next door.

4. Check the lease

If you are buying a business that operates from a specific location, check the lease for those premises. You should consult your lawyer and possibly a real estate professional to ensure the lease can be reassigned and the terms are acceptable.

5. Understand the market

Is the business you’re considering in a market that’s entering a growth phase, or has it stalled? Research as much as you can about industry characteristics such as customer demand, local and international trends and technological developments.

6. Understand the competition

You need to know who your competitors are, what their prices are, what they are good at, and what they are bad at. This will help you assess the opportunities and risks and whether the business has a point of difference compared with competitors.

7. Assess the growth potential

You may be satisfied with a business that will continue to deliver the same returns to you as it did the previous owner.

However, most people look for a business that they can improve and grow. Consider whether there are opportunities to grow, such as extending premises, opening longer hours, exploring new sales channels or targeting a different market.

You’ll also need to assess whether there are any major barriers to growth such as market saturation, location issues, policy or legislation, and changing consumer attitudes.

8. Seek advice

You might be surprised at how much information you can gather by talking to business owners within your industry. Non-competitors in another location can be a great source of free advice.

Consider assembling a support network consisting of an accountant, experienced mentor, Business Specialist and lawyer.

9. Conduct your own research

It’s important to do your own research on the business you are buying, and not simply accept what the owner or business broker tells you.  For example, check online feedback and blogs to see what customers think and see if there has been any bad press/PR. Ask suppliers, customers, contractors; in fact anyone that has dealt with the business in the past. Areas to research include:

  • Customers and suppliers – what is their level of satisfaction about their dealings with the business? Have customers or suppliers experienced any major issues with the business? 
  • Business systems – inefficient or poorly designed systems can be a major drag on a business and can be difficult, time-consuming and expensive to address. 
  • Equipment – check for old, obsolete, or poorly maintained equipment.  
  • Staff – do they have the right skills, attitudes and values? 
  • Stock – look out for out of date or old stock that may be hard to sell.

10. Have a contingency plan

Will the business provide you with a salary you can live on? If not immediately, will it in the future? Do you have sufficient funds to tide you over until it does? And importantly, do you have an exit strategy or a plan in place if things don’t go to plan?

Considering buying a franchise?

If you’re thinking about buying a franchise business, check out these useful guides:

Start out right

If you’ve done your research and decide that you’ve found the perfect business for you, take advantage of the ANZ Business Start-up Packagedisclaimer. You can enjoy special benefits such as no monthly account or transaction fees on your ANZ Business Current account in the first yeardisclaimer, plus a range of support to help you succeed.

For more information

 

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This material is provided as a complimentary service of ANZ Bank New Zealand Limited ("bank"). It is prepared based on information and sources the bank believes to be reliable. It is subject to change and is not a substitute for commercial judgement or professional advice, which should be sought prior to acting in reliance on it. To the extent permitted by law the bank disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to the material.

This material is for information purposes only. Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008. It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product. If you wish to consult an ANZ Business Specialist, please contact us on 0800 269 249.

Package details are subject to change. Lending criteria, terms and conditions and fees apply to all lending facilities.

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