Buying a Business in New Zealand

12 Feb

There is a significant opportunity globally and in New Zealand to purchase established businesses. This is because of the aging population of the ‘baby boomer’ generation that currently owns a significant portion of the market. These businesses are proven, have a history of performance and often have opportunities for new owners to come in, update technology and marketing and further improve performance.

Buying an existing business has its perks and can be a safer option than a start-up. This is because it is typically proven and includes; an existing customer base, premise (if relevant), brand, staff, suppliers and proven financials to name a few.

If you think that purchasing a business may be in your future then below is an overview of the process for owner-operators based on my experience funding these transactions over the past 9 years. This will not include everything however will give you a good starting point. Do not hesitate to reach out to discuss your options and seek personalised advice.

RESEARCH, RESEARCH, RESEARCH:

If you are thinking about purchasing a business you need to do your research. This is very important and you need to know the market and industry inside out. Buying a business is a more complex process than purchasing a residential property and you can’t just list it for sale if you got it wrong. Below are some questions I would recommend answering before taking it to the next phase.

Who are the competitors? What is their offering? What are their plans?
Who are the suppliers? Will they continue?
Who are the customers? Will they continue or are they tidied up with the owner?
What trends are you noticing in the industry or region?
Is the market growing or declining?
Is it likely to be disturbed by technology or other external factors?
Are there any local or government plans that could disrupt or provide an opportunity?
What are the reviews like and their online presence?
Is the business reliant on the existing owners itself or can it function without them?
Is there an opportunity to improve the business or streamline, maybe bring it into the 21st century?
What is your experience, is there anything you are lacking or would need to outsource? Can the business financially support this?

The next step is to register your interest in the business and attain all the provided information for the business. Typically, businesses are sold through a business broker and they will provide an information memorandum that will have financials (minimum 3 years), lease details and business commentary etc.

Business brokers will do due diligence on a business themselves and whilst they do work for the vendor they will usually provide a lot more information than a private sale. To attain the information memorandum, you will need to sign a confidential agreement to protect the vendors which is standard practice.

DUE DILIGENCE:

Once you have received the information it is time to assess the business in greater detail and prepare a business plan. This is an opportunity for you to plan the business and outline what the strengths, weaknesses, opportunities and threats are. Business.govt.nz has a great template if you are a little stuck on where to begin.

At this point in time, I would recommend getting some strong advisors on board. You will want to be relatively confident now as this is when you start to involve professionals who will charge for their time. At a minimum, you will need an accountant, solicitor, or financial advisor that specialises in business finance. Remember not all advisors are considered equal, ensure they have experience in business acquisition transactions so that you are confident you get the right advice. In terms of timeframes, you need to allow significant time for due diligence. I would be reaching out to your advisors early and checking their availability but at a bare minimum you should be looking at no less than 20 working days.

Accountant who can independently review the historic financials to ensure they seem reasonable and provide advice on how the business is operating. You may well find areas where you can streamline, cut costs or that need more investment. These changes will need to be shown in a forecast which your accountant can help prepare. There are three types of forecasts that you need to prepare as part of your due diligence; monthly cashflow, profit and loss and balance sheet. Your accountant will also be able to provide some advice around industry standards for a purchase price.

Solicitor who can independently review sale and purchase agreement, check any relevant intellectual property, pending court cases or other legal disputes. Your solicitor will review all contracts i.e. employment, suppliers, customers, rent, supply etc. It is your solicitors job to ensure there are no surprises in the business.

Financial Advisor who can provide funding options along with recommendations for day to day transactional needs. If funding is required they will be assessing the business in detail for its serviceability, cashflow and the risk of defaulting. To do this they will require all financial information, lease details, business plan, deposit or security available and a completed statement of position for any directors and majority shareholders. Your financial advisor will also be able to work with the chosen bank to set you up with other requirements including accounts, internet banking, apps, cards, working capital, foreign exchange and merchant facilities if required.

No two business purchases are the same and neither is the way they are financed. Options can include; deposit, equity release from property, leverage commercial property part of the purchase, cashflow lend against the new business, asset finance loan against assets being purchased in the business, working capital facilities and vendor finance. Book a call with one of our advisors to discuss your own individual options.

MAKING AN OFFER:

To make an offer on a business you need to understand its value. Typically, businesses prices are broken down into two main types - goodwill and assets.

Goodwill is based on how the business operates and what it has built up during the years. It represents the ‘potential future earnings’ of a business. Goodwill can be customer base, patents, trademarks and reputation. For example, a business with a strong financial position, customer base and reputation will have a higher Goodwill figure than a rundown business. Your accountant will help understand the value of the goodwill. Most industries have a general guide that gives you a starting point. Goodwill can be very subjective and future opportunities could also come into consideration.

Assets can be made up of anything tangible, they can include; land, buildings, vehicles, equipment, stock and chattels. For example, in a retail store the majority is stock and in a motel, it is chattels. The vendor will give a value to this but I would highly recommend getting your own independent valuation completed to ensure it is a true figure and not overinflated. Also, be sure to account for the variance figure as you need to be prepared to have this on settlement day, for example, if your stock is listed at $100k and there is variance of 25% up or down you will require an extra $25k over and above purchase price.

Once you have worked out a price you want to offer feel free to test it subject to conditions. Your solicitor will draw up the contract for you. This ensures it is legal and they will include everything that covers your back. You may also want to include restraint of trade, staff details and always include a due diligence period to ensure you can do further due diligence and if needed finalise funding. You would typically allow at least 20 working days for this depending on where you are at with your advisers and the information they already have.

OFFER ACCEPTED:

If your offer is accepted and you wish to proceed it is onto finalising funding, setting up your structure, and preparing for settlement day. Normally there will be conditions attached to any funding approval and you will want to tick these off before you go unconditional. Once unconditional you will need to pay a deposit, typically 10%. Depending on your situation you may have cash or if you are using equity in a property you may require a temporary overdraft until settlement. Post going unconditional you need to start setting up the business:

Incorporate the company and register with IRD
Set up business bank accounts
Set up an online accounting system i.e. xero or myob
Set up merchant facilities if required
Set up a payroll system
Set up all required marketing for the launch

In summary, it is fair to say there is a lot of work involved in buying a business. The more research and advice you receive up front, the better, as you do not want to be in a position where you are blind-sighted and it all goes bad. All in all, there is a huge opportunity on the horizon to buy or buy into a baby boomer’s business. Please note that the above is simply an overview and if you need deeper advice, I am more than happy to help.

Happy hunting!

HELPFUL LINKS AND INFORMATION:

Willis Legal - The Key Factors to Consider When Making an Offer to Purchase a Business

Business.govt.nz - Buying a business or franchise — business.govt.nz

Business plan template - How to write a business plan — business.govt.nz

Companies Office - New Zealand Companies Register

IRD Tools - Business and organisations

Business Mentors - Business Mentors NZ

Icehouse - Business Coaching for Kiwi SMEs | Icehouse

Jess Shaw