Buying a Business
Are you thinking about buying a business? It is important to make sure you have your ducks in a row before you take the leap.
Buying a business is a very exciting time – it is an opportunity to take control of your own destiny and a stepping stone towards financial success. However, the process of buying a business can also be very daunting. In this blog we provide a basic roadmap for the process of buying a business.
Identifying a Viable Business
The first step is to identify a viable business to buy. Think about things such as the nature, size and location of the business. If you are intending to manage the business yourself, then consider whether you have the requisite skills, knowledge and experience. A poor fit between the business and the owner can be a recipe for disaster from the outset.
You will also need to know where to look for a business. Often businesses are listed for sale on Trademe. However, Trademe does not provide a complete list of all opportunities in the market. Some business owners might be thinking about selling their business, but they just haven’t taken the action to list it for sale yet. A good way to identify potential businesses for sale is to door knock or talk to your professional networks – i.e. bankers, accountants, lawyers etc. Often these people will know of businesses that are considering selling.
Preliminary Due Diligence and Valuation
Once you have identified a potentially viable business then you should perform some initial due diligence. For example, have a look at the business’ website and social media accounts, read customers reviews online, consider the products and services offered by the business, review staff profiles, look for any media coverage of the business and talk to neighbouring businesses in the area. You should also consider external factors such as industry trends, economic outlook and changes in the local market.
You will also need to consider how much you are willing to offer to buy the business. We strongly recommend that you seek professional advice to help with a valuation of the business.
Making an Offer
Once you have identified a business that you would like to make an offer to buy, you then need to consider the terms of your offer. This is a pivotal stage in the process and it is highly recommended that you seek professional advice from a qualified lawyer. Poorly planned terms of offer can result in disaster down the track.
First and foremost, it is important that the offer is conditional on any factors that you may need to work through before settlement – generally this could include finance, solicitor’s approval and due diligence. This is important because it gives you the opportunity to back out of the transaction if the need arises.
Other key terms in the contract could include non-competition clauses, non-retention claw backs, payment structures, settlement date, vendor handover period and turnover warranties.
Formal Due Diligence
If your offer is accepted and the contract enters a conditional phase, your next step will be to perform formal due diligence procedures. This phase is similar to a builder’s report when buying a house. A due diligence process involves reviewing the key factors of a business such as its assets, contracts, financial information, information systems and human resources to ensure that the business is in an appropriate state before you commit to buying it.
It is at this stage that you should also obtain approval for any finance required to fund the purchase of the business. Often banks will require a formal business plan and financial forecasts to be submitted as part of this process.
Preparation for Operations
If your due diligence process is successful and you decide to proceed with the purchase of the business, you will then need to prepare for takeover of the business. There are many things you need to do before you take over the business including:
- Determine the appropriate structure and set up the relevant entities
- Determine and implement appropriate financing structures
- Organise IRD registrations (i.e. IRD numbers, GST registration, employer registration etc.)
- Set up systems (i.e. accounting system, POS system, job management system etc.)
- Organise insurances
- Develop a business plan
- Develop financial forecasts
- Implement new contracts
On the settlement date you should be fully ready to commence operations. It is best that you have a formal transition strategy in place to ensure the handover goes smoothly. From the customers’ perspective it should appear to be business as usual.