Buying a business

Posted on July 25, 2017 in Commercial (Tags: Building Business, Commercial Law, purchasing a business, buying a business) commercial-image (002).png (1)

You’ve had a bad day at the office and have decided it is time to make a fresh start. You have finally decided to “do your own thing” and buy a business.  Where do you start?  Who do you go to?

 

For many people, the prospect of running their own business for the first time can be a daunting one. One of the good things is that New Zealand is a nation of small businesses, and there are plenty of people out there with appropriate experience who can give you a helping hand so you shouldn’t be put off by a lack of experience. 

 

There are some key things which you should look at closely if you identify a possible new business opportunity.

 

The first thing you need to do is understand the business itself. Do some research into the market for the goods or services it offers, and understand where this business fits in that market.  Could its profitability be threatened by increased competition?  Will technology make its role redundant?  Are there ways in which the business can broaden its range of goods or services to increase sales?

 

It is also important to look at the key customers. How certain are they to continue to purchase the goods or services the business is offering?  How important are the relationships with the current owners and do you need to seek some continuity from them?  What is the payment history of the key customers?

 

If the business operates from a physical premises, you need to investigate the terms of the lease in particular, how much control you will have over the future terms of the lease. Is the lease due to expire without any further rights of renewal?  Is there a particularly long term which might see you being compelled to stay there beyond a desirable length of time?  Is the site critical to the success of the business?

 

It is important that you get good disclosure of the finances of the business for previous years. You may be asked to sign a confidentiality agreement before receiving this information and this is entirely reasonable.  Not only should you get the accounts which have been prepared by the vendor’s accountant, but you should also ask for GST returns as they will show the figures which are being returned to IRD.  The accounts should also show the assets of the business and the “book value” of those assets which is the value of the assets after depreciation.  It is important to remember that any business purchase is a negotiation and you are not obliged to take assets which you don’t want to buy.

 

You should have your lawyer review any key agreements with suppliers and customers and also any equipment leases and/or licences such as for software which you may need to assume.

 

A change of ownership in a business creates a technical redundancy situation for employees so it is important that you determine whether you would want employees to come with the business and, if so, understand the terms of their current contracts. Certain employees such as cleaning and catering staff are considerable to be vulnerable employees and have a right to transfer under law. 

 

If the business utilises intellectual property, you need to determine whether or not that IP has been adequately protected and whether the vendor owns the IP. This could be the rights to software which is critical to the operation of the business or it could be trade marks associated with the business’ branding.  If there are registered trade marks, these will need to be assigned if you purchase the business. 

 

Once you have made a decision to proceed, you should arrange to have an agreement drawn up by your lawyer or in some cases by the vendor’s agent or a business broker. Your lawyer will advise you about appropriate conditions you may wish to include such as finance and matters such as obtaining  a liquor licence if it is a hospitality business.  You will also need to ensure that all appropriate consents such as resource consent are in place to operate the business.

 

Once you take over the business, it is very important to make sure that you get some guidance if you are new to business ownership. A good accountant will assist you, and there are also organisations such as business mentors who can assist you for a very modest fee.  If you do your due diligence and look after your cash flow prudently, with luck you will have joined the club of New Zealand’s many successful business owners.

First published in the Otago Daily Times on 24 July 2017

Sally Peart