Buying a business

29 July, 2014 | Peter Smith

Buying an existing business is an important financial decision and should not be rushed. With assistance from your accountant and lawyer, you should carefully consider all aspects of the business purchase. Some of these considerations are listed below.

The sale and purchase agreement

A written agreement is recommended to prevent future confusion or disputes. When you buy a business, you can use a standard business sale and purchase agreement (available from the Auckland District Law Society), write one yourself, or instruct your lawyer to write one. It is important to ensure that the agreement is thorough and clear, and covers all aspects of the agreement, including the names of the buyers and sellers, the business being sold, the price, terms of payment and warranties, any special conditions such as finance, approval of the agreement and lease, restraints of trade, due diligence and so on.

The sale and purchase agreement needs to be reviewed thoroughly by both you and your lawyer before you sign it.

Financial aspects of the business

Study the company’s accounts for the last three – five years. You need to know if the business is in sound financial condition and is able to provide the return you are looking for. Consult your accountant and lawyer to assess industry operating ratios, the turnover figures, goodwill and so on. Take your time with this. Before you purchase the business, you should objectively assess whether the business is in sound condition, fulfilling the needs of its market, and is able to offer what you want.

What’s included in the business purchase?

If plant is included in the sale, assess how it has been valued – a going concern or salvage value. Consider any patents, intellectual property, licensing and lease agreements too. How old is the stock? Has it been priced accurately? Ask your lawyer to assess what exactly is being sold – the business, its assets or its shares?
Use all the information you can gather to assess what your two – three year profits will be. Try to take everything into account to come up with best and worst case scenarios. Critically assess your projected cash flow – will you be able to pay back the bank?
You will also need to consider the most appropriate business structure (ie, family trust, company, partnership, sole trader), insurance and GST. Like any legal transaction, we strongly recommend you get good legal advice from Smith and Partners before you make a decision. Getting good advice at the beginning of the process could save you a lot of money and heartache in the long run.

If you are considering buying a new business, please contact commercial lawyer, Peter Smith, on 09 837 6882 or email peter.smith@smithpartners.co.nz