5 tips when purchasing a business in New Zealand

Purchasing a business can greatly impact your life. Therefore, you should not entertain the decision lightly. Before making an offer, you need to: ​

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: ​

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:​

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 the transaction, including any changes required to the legal agreements. They can help you mitigate your risk by:​

You can attempt to value the business yourself, but you need to ensure you have access to the right information. ​

There are some standard valuation methodologies used for valuing a business, which your accountant or an independent valuer will be able to assist you with. Getting it right draws on multiple disciplines, including financial statement analysis and market economics. Ultimately, the valuation of the business is set by the market at the relevant time. While a formal valuation is useful as a starting point, the actual sale price will be set by how motivated the seller and buyer are and the strength of their respective negotiating positions.​

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. ​

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:​

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

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 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 purchasing a business in New Zealand, LegalVision’s experienced business lawyers can assist as part of their membership, which includes unlimited consultations with lawyers and unlimited document drafting, among other benefits. Call LegalVision on 0800 447 119 to learn more.​

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.​

How do you conduct due diligence when purchasing a business?​

When you conduct due diligence (either before you sign the sale and purchase agreement or after signing, provided a due diligence condition has been included), 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 considering 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.​