A Wellington mechanic was on the look out for an existing garage to buy.  Eventually, he found a tidy garage with a single owner, who wanted to retire and was looking to sell at what seemed to be a bargain price.  It seemed almost too good to be true.

The mechanic started meeting with the owner to find out more about the business.  It quickly became clear that the owner wasn’t too keen on the ‘paperwork’ and while his garage was tidy, the state of his documents was something else.

He had no idea whether he had contracts with his suppliers, had a fairly ‘casual’ approach to following up overdue payments, and wasn’t even sure if he owned all the equipment in his garage.

It quickly became clear why the owner was selling at such a low price, and the mechanic realised he would have quite a bit of work ahead of him figuring out whether the business was a good buy or not.

Buying a business is a big step and can be a huge risk, unless you do your homework.

Here are some steps you can take to maximise your chances of business success.

Know what you are buying

The value of a business often depends on the assets that are being purchased.  So, make sure you know what the assets of the business are and how much they are worth.  When you consider the assets remember to look at some of the less obvious assets like customer databases, operating manuals, trademarks, and designs.  Make sure that you are buying those successful systems and intellectual property of the business as well as other assets like any machinery, stock and office equipment.

“Due Diligence”

Of course, the seller wants to make the business sound as good as possible, so it’s a good idea to make your own inquiries and dig deeper to satisfy yourself that what you are hoping to buy is up to the mark. For example, we recommend that you:

  1. Try and get access to the business’ key customers and suppliers to find out what their views are about the business, and their future plans. Check what the terms of existing contracts are and find out what contracts will be signed over to you and what contracts you might have to renegotiate.
  2. Try and find out about the competitors. How do the business’s sales and prices measure up to the competition?
  3. Complete a legal due diligence. Are the assets of the business legally owned by the vendors? Are there any pending legal disputes? Are the contracts in order? What liabilities could the business face in the future?
  4. Remember to work with your accountant too – they will be able to provide advice on the financial position of the business and its long term viability.

You can include a due diligence condition in the Agreement for Sale and Purchase if the seller agrees to this. If you are buying a business like the above business, be aware that you will probably have your work cut out for you completing your due diligence and, if you do go ahead with the purchase, bringing the paperwork up to scratch.

What about existing employees?

Employees are key to the success of a business.  You should consider whether you will take on all or some of the existing employees, and if so, on what terms.  Negotiating to talk to key employees about their future plans makes sense.  The Agreement for Sale and Purchase needs to set out whether you are going to be responsible for outstanding leave entitlements of employees and, if so, how that will be dealt with on settlement.

Make sure you know what is happening with the business premises

If the business premises are leased check the terms of the lease, including the rent, how long is left on the lease and whether there are any remaining rights of renewal.  The last thing you want is to purchase a business and then have to move premises a few months down the track, or be hit with an unexpected rent increase!

Get advice before you sign on the dotted line

While you might feel rushed to sign up to a business purchase, it is best to get advice before doing so because many of the clauses you include in your sale and purchase agreement (such as a restraint of trade clause) can be vital to the success or failure of your business.

There is much to think about when buying a business – the above tips combined with helpful expert advice will go a long way towards helping you buy wisely and minimise any nasty surprises.

Claire Tyler
Commercial Lawyer