Buy Well – Part One
Having your own business is a dream shared by many people. After all, what’s better than taking on a new challenge and building an enterprise that rewards you not only financially, but also provides your life with greater purpose and, hopefully, freedom?
A popular avenue to obtaining your own business is to buy an existing one. An existing business offers some advantages over setting one up from scratch, including starting with:
- An existing brand and existing customers
- An established organisational structure with trained staff, systems, supply chains and relationships
- Premises and equipment
- A history of past performance including turnover, margins, expenses and overall profits.
The last item here, a history of past performance could be the best predictor of your future with the business. It’s one that we see buyers too easily dismissing by adopting too optimistic an attitude of “we’ll do it better”, and “we’ll put more hours into it”.
Businesses can always be improved but turning around an unprofitable or truly declining business takes something very special. It requires skills beyond those held by many people. It’s usually better to buy well in the first place.
Things to both understand and look for in the accounts provided by the seller include:
- Key themes, ‘signs’ and trends, including those of the industry itself
- Key people and seasonality impacts
- Unsubstantiated turnover claims
- An excessive asking price; amounts attributed to plant fixtures and goodwill
- Cashflow
- Adjustments to expenses to improve the appearance of the result.
That’s where professional advice comes in. Our business reviews a lot of financial information of businesses for sale under a ‘due diligence’ process as well as many practical issues of buying a business. One of business-life’s no-brainers must be to find yourself an experienced and motivated chartered accountant (they’re the qualified ones) to explain what information you need, to review this for you and to help you decide whether to keep going, run away or help to negotiate a better outcome for you.
A final part of the pre-purchase process is structuring your purchase for GST, risk protection and tax benefits according to your particular circumstance.
People are often (understandably) confused about the best order to follow seeing advisers about buying a business. This is a generalisation but we suggest this order:
- Chartered Accountant (they see the financial results for hundreds of businesses and might even know a business that’s for sale)
- Bank (to get finance shored up and other insights)
- Lawyer (to work through the detail a sale and purchase agreement requires before presenting it to a seller). Your lawyer will also work with your chartered accountant to ensure the tax and GST detail is optimal for you.
To speak to us about the business you’re considering buying, please call us on 555 9090 or email info@bsco.co.nz
