5 Things to consider before buying a business

Topics covered in this article: Business Owners, Employment

Tanya Drummond

Senior Associate

Senior Associate

Phone: +64 7 927 0582
Email: tdrummond@clmlaw.co.nz

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Bachelor of Laws – admitted to Practice in New Zealand (2000) and Australia (2003)

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Many people dream of owning their own business and working for themselves but before you purchase a business, you need to make sure you do your homework and understand exactly what you are buying. 

Here are our top 5 things to consider before purchasing a business:

Your personal investment:  be realistic about the amount of time, money and energy you will need to put into the business.  Do you have experience in the industry or will you need to upskill? Will you be operating the business yourself or do you expect to employ staff?  Are you putting your life savings into the business or securing borrowings against your family home?  Once you have a realistic idea of your personal investment and financial risk in the business, you can access whether the owners current and potential profit is adequate compensation.

Market Research: understanding the market that you intend to operate within is crucial.  Do your research on the industry trends in the region, the competition, the regulatory environments and compliance requirements, the potential for expansion and also any barriers to growth. Consider advances in technology that may impact on the business, positively or negatively. 

Due Diligence: it is essential that you inspect the tangible and intangible assets of the business.  The tangible assets include plant, equipment and vehicles and you should check that these are all in good working condition.  You may want to include specific warranties regarding the condition of the assets.  Depending on the business you are buying, the intangible assets, such as intellectual property rights and goodwill, may be more important and valuable to the business than the tangible assets.   The amount of goodwill payable for a business reflects its profitability, location, brand and reputation in the market.  You should take into account the impact of the current owner on the business and consider whether the business will continue being as profitable once the current owner is no longer there.

Business contracts and lease: if the business you are looking to purchase operates from leased premises, you will either need the current lease assigned or a new lease in place on settlement.  For a lot of businesses, location is very important and therefore you should ensure that the terms of the lease allow you to remain in the premises for an adequate period of time.  Supplier contracts are also important, especially when there is an exclusive supply arrangement or where it is difficult to source your products from other suppliers.  If these contracts are not properly transferred it can seriously affect the profitability of the business. 

Seek professional advice: assessing the viability of a potential business is not an easy task.  Consider enlisting the help of a good accountant to assist with valuing the business and a good lawyer to review and advise you on the contract terms, leases and any regulatory requirements.  If you are borrowing money to purchase the business, you will need the assistance of your bank manger and your lawyer for completion of any loan or security documents. Seeking professional advice at the beginning can save you a lot of time, money and stress down the track.