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When buying an existing New Zealand business, it can be challenging to take a back step and objectively weigh up important underlying factors in the decision to purchase. It can be helpful to have some questions in the back of your mind when conducting due diligence for a potential purchase. This article sets out three questions orientated at remembering the bigger picture. These include asking:

  • why the business is being put up for sale;
  • what the business’ growth prospects are; and 
  • what fair value is for the business.

Why Is the Business for Sale?

There are usually several reasons why the existing business owner is selling the business. However, they may not always be completely open with you about what those are. It is common to hear that the business owner is eager to slow down or retire, but you should make sure to go beyond any face-value explanations. While those justifications may be completely accurate and honest, you should still investigate whether there are any deeper reasons why the existing owner wants to let go of the business.

For example, some owners try to sell their business when they anticipate a difficult or existential financial crunch on the horizon. Selling the business can be an effort to get money and back out of business before risking it on an oncoming iceberg. This is why detailed due diligence is so vital when considering purchasing a business. 

Ask yourself:

  • is the business actually profitable?
  • are there looming lawsuits that will cost the business a lot of money? 
  • are there issues with tax compliance? 

You should certainly ask as many deep questions as possible to ascertain the truth about why the business is for sale. Likewise, confirm that there are no red flags in the business’ books that the owner may not be forthcoming with in conversation.

What Are the Business’ Growth Prospects?

Another critical question to ask is the nature of the business’ growth and whether it is poised to grow in the future. If the business is already growing quickly (for instance, by adding branches or new stores), you should check to see how sustainable that growth is in the future. 

Alternatively, if the business is not growing, you should ask questions as to why. If the business has attempted to expand previously (such as to another country), and it did not go well, that may be a concern for you. Is there an underlying issue that halted the business’ expansion in the past?

This is also relevant in the context of the business’ competition. You should already have a good idea of who the business’ competitors are and the risk they may pose to your business’ future growth. You should take a wide lens and consider the industry and whether the industry itself is likely to grow, as well. 

Ask yourself:

  • if new technologies or regulations come into play, how is the industry likely to fare? 
  • will it grow or see its market share shrink as new players come in with new tools and offerings? 
  • how will your potential purchase fare within that same market? 

It is important to continually think through these macro questions about the business.

What Is Fair Value for This Business?

At the end of the day, when purchasing a business, you should want to buy the business at fair value or less. You do not want to overpay. Likewise, you should be thinking about what details are ‘priced in’ to the business’ price, for instance, growth that might not be sustainable. You should also have your accountant or lawyer check the company’s valuation in terms of its real assets. 

Key questions to consider are:

  • are the business’ plant and equipment in good order? 
  • to what extent has the business’ stock been valued appropriately? 
  • is the amount for goodwill appropriate given the reputation and earnings of the business?

You must look beyond the revenue and other top-line figures of a business when considering purchasing it. Consider not just the sales line but what actually goes into those numbers, and talk to an accountant to check your ideas. For instance, are sales repeating or non-repeating? Is there evidence of consistent sales growth year-on-year? These questions should assist you in working out what fair value for the business is. 

Key Takeaways

There are several questions to ask yourself when considering buying an existing New Zealand business. It is essential to take a back step and consider the objective picture of the business, particularly when ascertaining what the fair value of the business is and what its growth prospects are. You should also ask why the existing owner wants to sell and check the details to make sure there are no red flags in the business’s documents.  

If you want to know more about buying an existing business, including what questions to ask and how to value the business, contact LegalVision’s business sale lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

How do you know what a business’ fair value is?

Many things go into the valuation of a business, like financial information and additional factors like a business’ goodwill. You should get professional advice (from a valuer, accountant and commercial lawyer, for instance) when factoring in a fair value.

What is goodwill?

A business’ goodwill is its good name and reputation. It is a dollar amount usually trying to quantify the business’ brand strength and reputation amongst customers and clients.

Can an owner refuse to give a purchaser information about a business?

This should be a huge red flag. If an owner is hesitant to part with certain business information, you should be very careful and ask why they do not want to do so. As a potential purchaser of the business, you have a right to understand all of the relevant details and information.

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