Buying a Business: what you need to know

Ever dreamt of being your own boss – of owning your own business?  Whether it’s the ability to control your own destiny, freedom from the boss or corporate structure, or maybe the status, peer recognition, or for purely financial reasons, owning your own business has many attractions.

The very idea of owning your own business can inflate your sense of self-worth, provide invaluable personal satisfaction and offer exciting possibilities of significant financial gain. The flipside is it can also feed your insecurities, self-doubt and perhaps end in financial disaster. After all, the many pitfalls along the way to self-employment is why many of us cling to the security afforded by our 9-5 job. So how do you go about setting yourself up for success and not failure when buying a business?

Firstly decide if you are business ready. It’s a good idea to build a profile of the key things you enjoy doing and of your strengths – your ideal business will contain many of these. Also list your weaknesses and the things you don’t enjoy doing. Determine how much you are prepared to risk, the hours you are willing to work, and any potential impact on your lifestyle and income needs. Write these down to help you stay focused.

Owning and operating a business is likely to take up a significant chunk of your time, so when searching for a business, perhaps the single most important factor to consider, is that it must be something that you will enjoy. Secondly, consider your skill set. Although some skills can be learnt on the job, or imported, your specific strengths can immediately add value to the business.

Searching for the right business can take time. Regularly check what’s on offer through internet sites like www.nzbizbuysell.co.nz and newspapers. Contact key brokers who operate in your area of interest. If you are seeking something specific, then get to know the appropriate associations and let them know you are interested in buying a business. Consider advertising for what you want – ask your accountant or anyone else who may have contact with potential business sellers.

Having searched and enquired about many, you believe you have found the ‘right business’ for you and your needs. It’s now time to drill down to make sure you’ve got it right.

It’s a good idea to understand the industry in which the opportunity lays. What drives it and what’s important to be successful in this area? Ask yourself if it is something you can add value to and have a vision for. Will it deliver the lifestyle you want? You may need to talk to knowledgeable people in this field to get a better understanding on how this industry works and where it’s going.

There is always competition, find out who they are and work out how this business is positioned to operate in light of that competition and any market threats. How loyal are the current customers?

All businesses need customers – who are the key customers, what do they represent as far as sales revenue, and how easy will it be to transfer their business across to any new owner? Get a breakdown to see where the business' revenue is coming from and find out about the current owners relationship with these clients.

There will also be relationships with suppliers, potentially a landlord, maybe a franchisor and staff. Find out what the contractual arrangements are – are they in writing? How suitable they are to you as a buyer and can they be easily transferred to the new owner?

A key factor for any business is its profitability and it's ability to generate sufficient revenue to service any loans, pay the expenses, the wages, the owner’s salary and, most importantly, a profit. After all if there’s no profit, you’re buying yourself a job, not a business. Request to see at least the last three years accounts, check these for trends, and discuss them with your accountant.

So it’s still looking good! Time to go deeper and to verify that what you have been told is correct. Review all systems, leases, contracts, employment matters, any intellectual property and ensure these are legally sound – it’s good practice to use a lawyer here.

The business works well, and checks out fine. Now it’s down to the dollars. Determine what’s a fair and reasonable price for the business, find out exactly what plant and stock is and isn’t included in the sale, and ensure these are listed and valued appropriately. Also, that the goodwill (the intangible assets) is appropriate to the strength and earnings of the business.

Buying an existing business offers significant advantages, including a customer base ensuring cashflow from day one. Experienced and skilled employees are often ‘inherited’ with the business – they understand the business and its customers and are valuable to any going concern as long as they stay on.

Owning a business can be very rewarding. Make sure it’s something you really want to do, something you’re passionate about, have a vision for and have the necessary skills to add value to. In buying a business or franchise always do your homework and consult with professionals.