What buyers should look for in a business

Buyer beware. It’s a phrase that buyers of established businesses should be particularly conscious of. Craig Hudson explains the pluses and the pitfalls.

The next ten years could see a huge number of businesses go up for sale as owners reach retirement age, giving many potential buyers the chance to acquire those businesses.

Statistics New Zealand data shows a quarter of New Zealand business owners will reach their late 60s in the next decade, meaning there could be up to 90,000 owners retiring and selling off their businesses in that time.

There are great benefits to buying an already established company, including access to a customer database, experienced staff, suppliers and hopefully, a good business plan.

Buying an established business is a massive commitment though and it is a process that keen buyers should undertake with care.

What do you really want?

Director of iif Ltd and Xero succession report working group member Hamish Mexted said the first thing potential buyers should do is ask themselves whether they are actually ready to own a business.

A lot of people like the idea of being their own boss, but then they realise it’s often no different to having a job, which makes them hate the business as much as they hated their job. Running a business can mean being available at all hours to deal with all the unanticipated events and the stress that inevitably comes with that.

People also don’t realise that being good at a job does not mean they will be good at running a business. A builder could create an amazing house, but be absolutely terrible at keeping books or managing staff, for example.

According to Mexted, one of the key indicators that a buyer is serious is how detailed their future plans for the business they want to buy are. This means more than just stating they will grow the business – it also means specifying exactly how that growth is going to be achieved. 

“If people can’t articulate what this plan is in a credible way, then I get a little anxious for them,” Mexted said.

Figuring out whether running a business is for you or not can be quite tricky, so sitting down with an accountant should be one of the first things on your to-do list if you are looking to buy a business.

Making sure things stack up

Potential buyers need to ask a lot of detailed questions and look into a company’s financial data to check that what the seller says about their business adds up. The importance of updated and accurate financial records cannot be overstated.

What a buyer needs to check is industry-specific to an extent, but includes checking assets are in good condition, making sure GST returns add up and ensuring the wages the seller claims to be paying are actually what they are paying. If you buy a business from someone claiming they pay their staff $20 an hour when they actually pay them $22, then that will rapidly eat into margins. 

Mexted said it was not uncommon for things to not add up, but it is often not deliberate. 

“Vendors are not used to having people chuck rocks at them. Because they’ve always been so involved with what they’ve done, they can’t see that it doesn’t stack up. It might be a statement they believe to be true, but they haven’t thought through the consequences.”

Again, it would be worthwhile consulting an accountant who has experience in asking those nitty gritty questions.

What else to keep in mind

Looking into the background of a company for sale should also entail checking whether there are any legal disputes and making sure there are contracts in place covering things like suppliers, rent and employment. It also requires checking how loyal customers and suppliers are to the owner, as well as the relationships between the current owner and staff.

Take a deep dive into the company’s records to look at revenue trends and where improvements could possibly be made. Look at what money is owed the company and how well the owner has chased up that debt.

There is a long checklist of things potential buyers need to get through before making that final decision and that’s before even getting into the running of the business itself. 

Therefore, any aspiring business owner needs to understand what they are getting into and ideally consult with professionals to help make that business acquisition a success.

Xero recently released a report to look at the lack of succession planning in New Zealand with the tidal wave of retirements predicted over the coming decade. Success through succession planning aims to help small businesses prepare for selling their business to get the best possible outcome. 
Craig Hudson is Xero New Zealand’s country manager. 

Photo: Hamish Mexted.