The secret seven

By Kate Pierson

So you want to buy a business and, naturally, you want to get a bargain. You feel it’s time to become an exclusive member of the company owners club and exercise your organisational prowess.

When searching for your commercial soulmate, it’s about finding a business that reflects you, because buying a business in unfamiliar territory can cause professional disorientation. It’s a bit like adopting responsibility in the form of a furry little friend; you need to treat your business like a living, breathing organism that requires your full attention and sustenance to survive. It must have nutrition, in the form of a healthy cashflow, loyal customers and productivity enhancing assets and structures.

And while experimenting with the idea of buying a business is one thing, actually doing it and successfully so, is quite the journey. It’s all about planning a professional process, nzbizbuysell director Richard O’Brien says.

“Decide what you want, what your objectives are and know your strengths and weaknesses. Look around, do the homework and determine what’s needed to make this sector work, then take the plunge — there are many opportunities out there for buying well and gaining an excellent return on your investment, with a lifestyle to suit.” 

Connecting business buyers and sellers through his interactive online organisation at www.nzbizbuysell.co.nz, O’Brien has offered his expertise on how to buy a business bargain. “Owning a business can be very rewarding.

“Apart from the potential to amass wealth, you get to decide when and how long you work, who you work with and the manner in which you produce the product or service,” he says.

“But make sure it’s something that you really want to do, something you are passionate about, have a vision for and have the skills to add value to. In buying any business, always do your homework and consult with professionals.”

In buying an existing business you are getting:

• An existing customer base — These are the people or businesses that already do business with you. This means cashflow from day one
• Accepted products and/or services — They have already been developed and accepted into the marketplace
• Existing employees — Experienced and skilled staff who understand the nature of the business and its target demographic
• Operating Systems — These are key in any business. Knowing and understanding how the business operates, what keeps customers coming and the cash flowing is critical to productivity.  The pre-existing business formula developed by the previous owners may be ideal or require a major overhaul
• History — The previous owner has operated this business and will be able to show you its financial records, cash flow, sales and expenses. Being privy to this information from day dot lessens the risk to you and your bankers as the fundamental facts and figures illustrate the company’s performance and provide you with a platform to build on.

The quality of your choices and your pursuit of valid information will play a large part in determining your success — so here are seven keys for buying a business:

1. The business is in an industry you have or can gain experience in.

This is about ensuring you buy a business you have a vision for and can add value to while living and supporting the lifestyle you want. What can you bring to this business to make it great — improved systems, tapping into new markets, and injection of cash to improve outputs? Be clear on what will build this into a great business. Check with industry experts to make sure your thinking is right.

2. Whether there is a sound market now and tomorrow for the product or services this business provides, have an informed understanding of how competitive and sustainable this market is.

It’s important to do your homework here — a key aspect to any business is its future. The brighter the future the better, as this will help with growth, cashflow and the potential sale of your business. If it’s an overly competitive market how will you stand out and not get pulled into competing on price?

3. Know who the key customers are, what they represent sales wise, how they feel about this business and if they are friends or related to the current owner.

A healthy mix of customers is best. Find out whether there are contracts in place with key existing clients and how loyal customers are likely to be when the business changes hands.

4. Why the business is for sale, how profitable it is and has been over the last three years; what are the trends?

If profitability has taken a hit, it’s on a downward slope and the owner is desperate to sell, this could be your opportunity to negotiate a great deal. Have your accountant check out your logic and help recast the accounts to confirm the business still has potential.

5. Be sure leases, contracts, employment matters and/or intellectual property is legally sound — seek the assistance of a legal mind to assess this.

Also, find out what the relationships, terms and contractual arrangements are with suppliers. Tighter sales timeframes usually open opportunities for better deals on leases, buying commercial property, equipment, and supplies — leaving you, the owner, with more and better choices. Evaluate your options here as there may be opportunities to achieve savings.

6. Is all the plant and equipment required in good order and listed? Has the stock been accounted for and valued appropriately?

Make sure that any goodwill is appropriate to the strength and earnings of the business. Perhaps the entire plant is not required by you, or some stock is out of date and unlikely to sell — get it down to only the things you need to run the business. Goodwill is often subjective and it’s in your interest to negotiate this.

7. Determine what legal structure you will utilise to operate the business, how you will fund and service the money borrowed for the business and how you will contribute to its success.

Will you set up a trust to own the business, is the vendor willing to remain invested in the operation, or allow for staged payments or concessions to help get you going? Your account or lawyer will help you get this right.

Back to the top.