The 7 Steps to Buying a Business

How to buy a businessIt’s not every day you buy a business. Acquiring a business is a big decision that can be hugely rewarding - a decision that only a small number of people will make more than once or twice in their lifetime. Here are some top tips to help you buy a business.

Why Buy an Existing Business?

Buying a business has a number of advantages over building a business from scratch. For one thing there is less risk when you  buy an existing business. Most businesses come with an established customer base and cashflow, proven products and/or services, existing  business systems and processes, trained staff, and an existing reputation and market position. If you were starting a business you would need to develop all of these things from scratch, so it typically requires much more time and effort, as well financial resources to get it going through this high risk phase.

Buying an existing business allows you to focus on growing the business from day one, rather than simply trying to ensure your business idea is viable. It will also be easier to borrow against as it will have a proven track record and cashflow that will make the banks more interested. The following tips will help you uncover how to buy a business:

1. What do you Want in a Business?

Are you looking for a small lifestyle business to provide a living income, something to grow and develop, or something to compliment your current business? Do you want to own it outright, or perhaps have a partnership? Do you want to be actively involved in the business or participate as a silent investor? What sector are you interested in?

There are many questions that need to be answered before you buy a business. Perhaps the single most important factor to consider is that it must be something that you will enjoy doing. Secondly, if you have specific skills,  you are immediately adding value to the business - although some skills can be learnt on the job or contracted in.

2. What does it Take to be a Business Owner?

Once you are clear about what you want, it is important to appraise your own core competencies, skills and suitability. Businesses are risky enough without diving into a sector you know little about and may not have the skills to successfully operate. Make sure you are business owner material and that it’s a venture you are fundamentally interested in - you will be much more likely to succeed!
It is important to back yourself by being across a number of areas, including sales, people management, accounting and resources. As a business owner you need to be creative and disciplined to make it work.

As a business owner you need to be:

  • Able to identify what’s important and do it.
  • Self-motivated - no one is going to push you.
  • Able to set your own goals and plan your path to success.
  • Able to manage the finances and profitability of the business.
  • Capable of managing your time and possibly staff.
  • Resilient and agile so you stay in business.

3. How Much Money do I Need to Buy a Business?

Your budget is often determined by the business’s  cashflow, your cash reserves, equity you may borrow against, and the bank and/or vendor finance. It’s best not to take on too much debt, and it is also important ensure you allow for working capital and some cash reserves.

High profit businesses usually come with higher price tags. Don't spend the lot then struggle to keep things afloat, and risk losing it all. Spending less will reduce your risk. Additional profits can be used at a later stage to expand or grow the business, once you have a thorough understanding of what the business takes. 

Most business buyers use bank financing. Banks are risk averse; they like houses and are nervous about businesses. They are more interested in securing your loan against family homes (where possible), or other key assets. They will also want to see that the business is able to generate sufficient cash flow (after expenses) before they give you a loan. 

4. How to Find the Right Business to Buy?

Define your criteria and list your must-haves, and like-to-haves. Determine what income you will be needing, which industries you are interested in, and how much you are hoping to spend.

Regularly check what's on offer through key Internet sites like New Zealand business for sale website, chat with business brokers that work in the area you are interested in, and network with anyone that could be helpful.

Once you have found something that looks interesting and fits your criteria, jump in and have a closer look at the business.

Searching for that right business to buy takes time - prepare key questions to get the facts, and stick to your criteria to save wasted time.

5. Researching and Evaluating your Business Opportunity

It's important to ask the right questions when you find a business to buy: Is it in a growing or declining market, is it well located and operated, does it have good systems and resources, and does it have the potential and future you want? Is the service or products relevant to today’s market and is it financially viable? Do you have a vision for where you could take this business? Is it you - does it fit your profile? The more work done here prior to making an offer, the greater the savings on fees, and the better the outcome for you.

Read more on the 10 questions you must ask before buying a business and our Top Tips when buying a business.

6. Get Professional Advice when Buying a Business

Great, so the business ticks all the boxes, and with its systems, products and services, it fits your profile and has the potential you want. Having done your preliminary assessment, you are now keen to proceed.

Now is the time for some more in-depth research and analysis, for confirming its viability and for determining what the business is worth to you prior to making your offer. Research every aspect you can and use professionals for guidance and fact checking. 

Once satisfied,consult with your solicitor and/or accountant to help draw up an offer (there are a number of ways to value a business and your accountant will help with this). Use a business broker, accountant or lawyer to assist you with the business buying process to ensure you get it right.

When making your offer it will be conditional upon certain aspects being verified and satisfied as more information is shared.

On acceptance of your offer. be thorough. Check everything - your accountant and lawyer are key here. This will cost (be specific and ask for quotes), but it will be cheaper than getting it wrong. You will usually be required to sign a non-disclosure or confidentiality agreement before the vendor will share more in-depth information about their business.

7. Verify the Facts by doing Business Due Diligence

So your conditional offer has been accepted. You now have a window of time to satisfy the conditions laid out in your Sale and Purchase Agreement. This is an intensive process where your team gets to put the vendor’s business under the microscope.

Due diligence is the process where you confirm that the information provided by the vendor and their team is as you were told it would be. In particular pay attention to the accuracy of any financials, financial forecasts, contracts, compliance, licences, customer lists and reports. 

Thoroughly investigate all aspects of the business including the business’s operations, its financial performance, legal compliance, employee staff arrangements, customer contracts, intellectual property, assets and other details.

If at any stage you find information that is different to what was asserted, then you have the option to cancel the agreement.

These points on “How to buy a business” are intended to act as prompts - they provide an overview only. When purchasing a business always seek professional advice.

By Richard O'Brien - nzbizbuysell

For more information on finding the right business to buy visit:
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