If you want to run your own business, but you feel intimidated by the high rate of failure that startups experience, you can look into purchasing an existing business. You can find businesses for sale in New Zealand on online platforms like realestate.co.nz, NZ BizBuySell or Trade Me Marketplace or through a broker. Before you make an offer, you need to carefully research the business and do your due diligence to ensure you are paying a fair price, and there are no underlying business issues. This article lists some key points and tips to help you make an informed decision when you purchase a business in New Zealand. 

Before You Buy 

A business purchase can impact your life on so many levels, so you should not take this decision lightly. Before making an offer, you need to: 

  • understand the type of business you are buying;
  • research the target business’s market, suppliers and competitors;
  • conduct due diligence before you sign the sale and purchase agreement (or make it conditional on the satisfaction of a due diligence investigation);
  • register your formal interest in buying the business with the person appointed to manage the sale;
  • engage a professional adviser (a lawyer or accountant) to represent you; and 
  • ask as many questions as possible about the business to determine whether any underlying issues could impact your revenue post-sale, such as the potential loss of critical customers. 

If you are buying a franchise, be wary of large upfront fees or being rushed to buy-in . You may be entitled to a seven-day cooling-off  period after signing your franchise agreement if your franchisor belongs to the Franchise Association of New Zealand. Franchise agreements can be complicated, so it is best to get legal advice before signing.Alternatively, you could get free advice from the Franchise Association of New Zealand. Before you buy a franchise, you should ask: 

  • for a disclosure document that outlines the company’s history and track record; and 
  • how you are required to pay ongoing costs such as advertising and stock.

1. Do Not Skimp on Your Due Diligence

No matter how tedious or boring, you should never skimp on your due diligence when purchasing a business. This process helps you determine whether the business is profitable and whether the vendor’s estimates and projections are over-optimistic. To conduct due diligence on the business, you should check:

  • if the business has any pending court cases or legal disputes;
  • if it owns all key business assets;
  • all contracts, including employment, sales, supply, rent and service levels agreements; and
  • if crucial staff members, customers and suppliers are loyal to the current owner.

2. Get Legal Advice Before Purchasing the Business

From employment to sales and supply contracts, there are several legal agreements involved in purchasing a business. You should get legal advice to review any clauses or agreements that are confusing or unfamiliar to you. Seeking legal advice will ensure that you do not miss any crucial details. 

Your lawyer can also provide you with legal advice on how to structure your purchasing entity to manage issues such as limited liability protection, tax and succession planning. You need to consider these before your settlement date. 

3. Engage an Independent Valuer

You can attempt to value the business yourself, but you need to ensure you have access to the right information. There are some standard methods for valuing a business but getting it right draws on multiple disciplines, including financial statement analysis and market economics. The classic approach to business valuation involves calculating the last three years’ average net profit and multiplying it by five. However, this and other popular models fall short by not taking into account growth and risk, and how these are related. 

An independent valuer can help you assess the business’s value to ensure that your vendor is not asking for an inflated purchase price. They also ease the sale and purchase process by allowing both parties to reach an agreement as they have independent authority.

4. Consider a Gradual Handover After Purchasing the Business

Some owners prefer a gradual handover where you pay off the sale price from your profits. This option reassures them that you, as the buyer, will make a success of the business. Therefore, you should discuss this option with your vendor, especially if they seem reluctant to sell or as a way to negotiate down the price. 

5. Agree on How to Manage the Business Restructuring

If the target business has employees, you should decide whether you will take over their employment and include this in your sale and purchase agreement. If you choose not to keep the existing staff, the seller must handle any redundancies before you take over.

The Employment New Zealand website provides some guidelines to follow when restructuring a business. This process will depend on:

  • the existing employment agreements;
  • the size of the business; and 
  • whether the business employs vulnerable workers. 

You can find out more about employee protection provisions in the Employment Agreement Builder.

Key Takeaways 

If you want to purchase a business in New Zealand, you need to register your formal interest with the person appointed to manage the sale. However, before you commit time and money to go through this process, it is a good idea to conduct thorough research on the business, including its market, suppliers and competitors. A due diligence process can help you uncover any underlying issues with the business, and an independent valuer can help you assess the business’s value to ensure the vendor is commanding a fair price. You should also get legal advice on how to structure your purchasing entity and to review any clauses or contracts you are unfamiliar with. If you are planning to restructure the business, you must follow the Employment New Zealand guidelines and ask the seller to handle any redundancies before you take over.

If you need help to purchase a business in New Zealand or legal advice on specific issues such as business restructuring or franchising, LegalVision’s business lawyers can help. Call 0800 005 570 or fill out the form on this page.

FAQs

Is buying an existing business a good idea?

If you want to avoid going through the challenges of the startup phase, you should consider buying a business. Some other advantages of purchasing an established business include immediate cash flow, existing employment and supply contracts, and the ability to leverage the previous owner’s experience.

Where can I find businesses for sale in NZ?

You can find businesses for sale in New Zealand using online platforms like realestate.co.nz, NZ BizBuySell or Trade Me Marketplace, or you can engage a broker. A business broker can present you with more tailored options that suit your needs and budget.

How do you conduct due diligence when purchasing a business?

When you conduct due diligence (before you sign the sale and purchase agreement), you need to analyse the business’s financial position and legal obligations, amongst other things. Depending on the complexity of the business and your previous experience as a buyer, you may need to engage a lawyer, accountant and (or) independent valuer to complete your due diligence.

How do you determine if a business is worth buying?

There are various methods for valuing a business but getting it right draws on multiple disciplines, including financial statement analysis and market economics. You can conduct a valuation in-house using a standard method, but you risk falling short by not taking into account growth and risk, and how these two factors are related. Therefore, you should engage an independent valuer to help you assess whether the business is worth buying.

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